Skye Bioscience, Inc. - Quarter Report: 2022 September (Form 10-Q)
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 September 30, 2022
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 November 11, 2022, there were 912,195,626 shares of the issuer’s $0.001 par value common stock issued and outstanding.
TABLE OF CONTENTS
2
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 early stage of our product candidates presently under development;
•our 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, 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 residual impacts of the novel coronavirus ("COVID-19") pandemic, or responses to a future pandemic on our business, clinical trials or personnel;
•regulatory developments in the United States and foreign countries; and
•any other strategic and financial benefits in connection with the Arrangement Agreement (as defined below), including any anticipated future results and pro-forma financial information relating to the resulting issuer and the sale of the historical assets of EHT, including, the expected timing of the closing of the Verdélite SPA (as defined below) and the ultimate liquidation value of EHT.
3
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 pandemic, the current global economic environment, including the impacts of the high inflationary environment, and associated business disruptions such as delayed clinical trials, 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.
4
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SKYE BIOSCIENCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2022 | December 31, 2021 | ||||||||||
| (Unaudited) | (Note 2) | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
Cash | $ | 415,389 | $ | 8,983,007 | |||||||
Restricted cash | 4,574 | 4,571 | |||||||||
| Prepaid expenses | 708,477 | 554,217 | |||||||||
| Prepaid expenses - related party | — | 13,432 | |||||||||
| Deferred asset acquisition costs | 1,388,444 | — | |||||||||
| Other current assets | 143,859 | 56,870 | |||||||||
| Other current assets - related party | 22,542 | — | |||||||||
Total current assets | 2,683,285 | 9,612,097 | |||||||||
| Property and equipment, net | 86,163 | 87,710 | |||||||||
| Operating lease right-of-use asset | 91,064 | 146,972 | |||||||||
| Other asset | 8,309 | 8,309 | |||||||||
Total assets | $ | 2,868,821 | $ | 9,855,088 | |||||||
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | |||||||||||
| Current liabilities | |||||||||||
Accounts payable | $ | 2,067,766 | $ | 897,880 | |||||||
| Accounts payable - related parties | 120,216 | 2,130 | |||||||||
| Accrued interest - related party | 305,734 | 174,911 | |||||||||
| Accrued payroll liabilities | 443,983 | 344,450 | |||||||||
| Insurance premium loan payable | 30,615 | — | |||||||||
Other current liabilities | 526,818 | 375,842 | |||||||||
| Other current liabilities - related parties | 102,390 | — | |||||||||
| Derivative liability | 326 | 59,732 | |||||||||
| Multi-draw credit agreement - related party | 450,000 | 450,000 | |||||||||
| Convertible multi-draw credit agreement - related party, net of discount | 2,005,371 | 1,524,905 | |||||||||
| Operating lease liability, current portion | 92,356 | 82,372 | |||||||||
Total current liabilities | 6,145,575 | 3,912,222 | |||||||||
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| Non-current liabilities | |||||||||||
| Operating lease liability, net of current portion | 8,227 | 78,700 | |||||||||
Total liabilities | 6,153,802 | 3,990,922 | |||||||||
| Commitments and contingencies (Note 10) | |||||||||||
| Stockholders’ (deficit) equity | |||||||||||
Preferred stock, $0.001 par value; 50,000,000 shares authorized at September 30, 2022 and December 31, 2021; no shares issued and outstanding at September 30, 2022 and December 31, 2021 | — | — | |||||||||
Common stock, $0.001 par value; 5,000,000,000 shares authorized at September 30, 2022 and December 31, 2021; 495,925,112 and 476,108,445 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 495,925 | 476,108 | |||||||||
Additional paid-in-capital | 53,065,217 | 52,644,221 | |||||||||
Accumulated deficit | (56,846,123) | (47,256,163) | |||||||||
| Total stockholders’ (deficit) equity | (3,284,981) | 5,864,166 | |||||||||
Total liabilities and stockholders’ equity | $ | 2,868,821 | $ | 9,855,088 | |||||||
See accompanying notes to the condensed consolidated financial statements.
6
SKYE BIOSCIENCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
Research and development | $ | 1,781,724 | $ | 327,731 | $ | 4,474,531 | $ | 1,818,059 | |||||||||||||||
General and administrative | 1,140,558 | 1,491,378 | 4,554,131 | 3,567,985 | |||||||||||||||||||
Total operating expenses | 2,922,282 | 1,819,109 | 9,028,662 | 5,386,044 | |||||||||||||||||||
| Operating loss | (2,922,282) | (1,819,109) | (9,028,662) | (5,386,044) | |||||||||||||||||||
| Other expense (income) | |||||||||||||||||||||||
| Change in fair value of derivative liability | (6,228) | (189,649) | (59,406) | 169,349 | |||||||||||||||||||
Interest expense | 211,229 | 195,358 | 615,563 | 570,322 | |||||||||||||||||||
| Gain on forgiveness of PPP loan | — | — | — | (117,953) | |||||||||||||||||||
| Total other expense, net | 205,001 | 5,709 | 556,157 | 621,718 | |||||||||||||||||||
| Loss before income taxes | (3,127,283) | (1,824,818) | (9,584,819) | (6,007,762) | |||||||||||||||||||
Provision for income taxes | — | — | 5,141 | 1,600 | |||||||||||||||||||
| Net loss and comprehensive loss | $ | (3,127,283) | $ | (1,824,818) | $ | (9,589,960) | $ | (6,009,362) | |||||||||||||||
| Loss per common share: | |||||||||||||||||||||||
Basic | $ | (0.01) | $ | — | $ | (0.02) | $ | (0.02) | |||||||||||||||
Diluted | $ | (0.01) | $ | — | $ | (0.02) | $ | (0.02) | |||||||||||||||
| Weighted average shares of common stock outstanding used to compute earnings per share: | |||||||||||||||||||||||
Basic | 495,925,112 | 413,489,603 | 495,891,596 | 376,547,498 | |||||||||||||||||||
Diluted | 495,925,112 | 414,461,032 | 495,891,596 | 376,547,498 | |||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
7
SKYE BIOSCIENCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (9,589,960) | $ | (6,009,362) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | 83,466 | 9,412 | |||||||||
| Stock-based compensation expense | 425,846 | 747,252 | |||||||||
| Change in fair value of derivative liabilities | (59,406) | 169,349 | |||||||||
| Amortization of debt discount | 480,466 | 439,053 | |||||||||
| Gain on forgiveness of PPP loan | — | (117,953) | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Prepaid expenses | 121,277 | (131,088) | |||||||||
| Prepaid expenses - related party | 13,432 | (18,125) | |||||||||
| Other current asset | (86,989) | — | |||||||||
| Other current assets - related party | (22,542) | — | |||||||||
| Other asset | — | (8,309) | |||||||||
| Accounts payable | 370,136 | (72,719) | |||||||||
| Accounts payable - related parties | 118,086 | 2,968 | |||||||||
| Accrued interest - related party | 130,823 | 86,737 | |||||||||
| Accrued payroll liabilities | 99,533 | 201,334 | |||||||||
| Operating lease liability | (60,489) | (6,442) | |||||||||
| Other current liabilities | 1,381 | 201,861 | |||||||||
| Other current liabilities - related party | 102,390 | — | |||||||||
| Net cash used in operating activities | (7,872,550) | (4,506,032) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Asset acquisition costs | (436,554) | — | |||||||||
| Purchase of property and equipment | (15,556) | (36,828) | |||||||||
| Net cash used in investing activities | (452,110) | (36,828) | |||||||||
| Cash flows from financing activities: | |||||||||||
Proceeds from the sale of common stock and warrants – net of $851,538 for the September 30, 2021 period | — | 6,146,496 | |||||||||
| Proceeds from common stock warrant exercises | — | 6,999,999 | |||||||||
| Proceeds from pre-funded warrant exercises | 1,967 | 11,800 | |||||||||
| Proceeds from stock option exercises | — | 4,783 | |||||||||
| Repayment of insurance premium loan payable | (244,922) | — | |||||||||
| Net cash (used in) provided by financing activities | (242,955) | 13,163,078 | |||||||||
| Net (decrease) increase in cash and restricted cash | (8,567,615) | 8,620,218 | |||||||||
Cash and restricted cash, beginning of period | $ | 8,987,578 | $ | 2,473,976 | |||||||
| Cash and restricted cash, end of period | $ | 419,963 | $ | 11,094,194 | |||||||
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| Supplemental disclosures of cash-flow information: | |||||||||||
| Reconciliation of cash and restricted cash: | |||||||||||
| Cash | $ | 415,389 | $ | 11,089,624 | |||||||
| Restricted cash | 4,574 | 4,570 | |||||||||
| Total cash and restricted cash shown in the consolidated statements of cash flows | $ | 419,963 | $ | 11,094,194 | |||||||
| Cash paid during the period for: | |||||||||||
| Interest | $ | 4,275 | $ | 44,087 | |||||||
| Income taxes | 5,141 | 1,600 | |||||||||
| Supplemental disclosures of non-cash financing activities: | |||||||||||
| Asset acquisition costs in other current liabilities and accounts payable | $ | 951,890 | $ | — | |||||||
| Financing of insurance premium | 275,537 | — | |||||||||
| Release of share liability to additional paid-in-capital | 13,000 | — | |||||||||
| Purchases of property and equipment in other current liabilities | 10,455 | 39,607 | |||||||||
| Establishment of right-of-use asset | — | 170,606 | |||||||||
| Accrued financing charges | — | 83,722 | |||||||||
See accompanying notes to the condensed consolidated financial statements.
9
SKYE BIOSCIENCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
(UNAUDITED)
| 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 | ||||||||||||||||||||
| Stock-based compensation expense | 150,000 | 150 | 150,208 | — | 150,358 | ||||||||||||||||||||||||
| Exercise of pre-funded warrants | 19,666,667 | 19,667 | (17,700) | — | 1,967 | ||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2022 | — | — | — | (3,043,399) | (3,043,399) | ||||||||||||||||||||||||
| Balance, March 31, 2022 | 495,925,112 | $ | 495,925 | $ | 52,776,729 | $ | (50,299,562) | $ | 2,973,092 | ||||||||||||||||||||
| Stock-based compensation expense | — | — | 144,364 | — | 144,364 | ||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2022 | — | — | — | (3,419,278) | (3,419,278) | ||||||||||||||||||||||||
| Balance, June 30, 2022 | 495,925,112 | $ | 495,925 | $ | 52,921,093 | $ | (53,718,840) | $ | (301,822) | ||||||||||||||||||||
| Stock-based compensation expense | — | — | 144,124 | — | 144,124 | ||||||||||||||||||||||||
| Net loss for the three months ended September 30, 2022 | — | — | — | (3,127,283) | (3,127,283) | ||||||||||||||||||||||||
| Balance, September 30, 2022 | 495,925,112 | $ | 495,925 | $ | 53,065,217 | $ | (56,846,123) | $ | (3,284,981) | ||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
10
| 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 | ||||||||||||||||||||
| Stock-based compensation expense | 600,000 | 600 | 145,980 | — | 146,580 | ||||||||||||||||||||||||
| Exercise of common stock warrants | 67,166,667 | 67,167 | 3,962,833 | — | 4,030,000 | ||||||||||||||||||||||||
| Exercise of pre-funded warrants | 11,800,000 | 11,800 | — | — | 11,800 | ||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2021 | — | — | — | (2,160,517) | (2,160,517) | ||||||||||||||||||||||||
| Balance, March 31, 2021 | 367,641,082 | $ | 367,641 | $ | 43,005,506 | $ | (40,894,498) | $ | 2,478,649 | ||||||||||||||||||||
| Stock-based compensation expense | — | — | 111,699 | — | 111,699 | ||||||||||||||||||||||||
| Exercise of common stock options | 106,250 | 107 | 4,676 | — | 4,783 | ||||||||||||||||||||||||
| Exercise of common stock warrants | 28,333,334 | 28,333 | 1,671,667 | — | 1,700,000 | ||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2021 | — | — | — | (2,024,027) | (2,024,027) | ||||||||||||||||||||||||
| Balance, June 30, 2021 | 396,080,666 | $ | 396,081 | $ | 44,793,548 | $ | (42,918,525) | $ | 2,271,104 | ||||||||||||||||||||
| Stock-based compensation expense | 750,000 | 750 | 484,973 | — | 485,723 | ||||||||||||||||||||||||
| Common stock and warrants issued | 58,111,112 | 58,111 | 6,004,663 | — | 6,062,774 | ||||||||||||||||||||||||
| Exercise of pre-funded warrants | 21,166,667 | 21,166 | 1,248,833 | — | 1,269,999 | ||||||||||||||||||||||||
| Net loss for the three months ended September 30, 2021 | — | — | — | (1,824,818) | (1,824,818) | ||||||||||||||||||||||||
| Balance, September 30, 2021 | 476,108,445 | $ | 476,108 | $ | 52,532,017 | $ | (44,743,343) | $ | 8,264,782 | ||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
11
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”) 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.
The Company is a preclinical pharmaceutical company located in San Diego, California that researches, develops and plans to commercialize cannabinoid derivatives through its own directed research efforts and through several license agreements with the University of Mississippi ("UM").
On May 11, 2022, the Company entered into an Arrangement Agreement, as amended on June 14, 2022, 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). On November 10, 2022, the Company completed the Acquisition. Each share of EHT common stock outstanding immediately prior to the effective time of the Acquisition was transferred to the Company in exchange for 1.95 shares of Company common stock (the “Exchange Ratio”). As of September 30, 2022, the Acquisition had not yet been completed and as such, the financial statements do not reflect the effect of the transaction.
Also, on November 10, 2022, EHT and certain other parties entered into a share purchase agreement with a third party for the sale of EHT's subsidiaries, Verdélite Sciences, Inc. for an aggregate purchase price of approximately USD $9,300,000, subject to certain adjustments. The sale of these subsidiaries will complete the divestiture of EHT's most significant cannabis production and cultivation assets (Note 11).
As of September 30, 2022, the Company has devoted substantially all its efforts to securing product licenses, carrying out its own research and development, 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 September 30, 2022, had a working capital deficit of $3,462,290 and an accumulated deficit of $56,846,123. As of September 30, 2022, the Company had unrestricted cash in the amount of $415,389. For the three and nine months ended September 30, 2022 and 2021, the Company incurred losses from operations of $2,922,282 and $1,819,109, and 9,028,662 and 5,386,044, respectively. For the three and nine months ended September 30, 2022 and 2021, the Company incurred net losses of $3,127,283 and $1,824,818, and $9,589,960 and $6,009,362, respectively. The Company expects to continue to incur significant losses through the end of 2022 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. As the Company approaches the initiation of its Phase 1 clinical trial, which is expected to occur in December 2022, it has increased research and development spending. During the nine months ended September 30, 2022, the Company expended significant resources on the Acquisition and experienced various transactional delays which resulted in the further extension of the outside date to close the transaction. Due to these delays, in October 2022 the Company entered into a working capital loan from EHT to provide funds to continue operations through the date of closing of the Acquisition (Note 11). These two factors, among others, have resulted in an overall increase in cash used in operating activities for the nine months ended September 30, 2022. Based on the Company’s expected cash requirements, without obtaining additional funding by the second half of 2023, management believes that the Company will not have enough funds to continue clinical studies. These conditions 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.
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Subsequent to September 30, 2022, the Acquisition was completed and the Company acquired the cash and other assets of EHT (Note 3). Management expects that the Acquisition will provide funding for the Company into at least the second quarter of 2023, which is expected to allow Skye to complete its Phase 1 clinical trial and commence its Phase 2 clinical trial.
During the third quarter of 2022, the Company met its operational funding requirements during the pre-closing period by, among other things, laying off two employees and entered into a $700,000 working capital Loan Agreement from EHT ( Note 11). In late 2022 and early 2023, the Company will continue with the liquidation of EHT's assets, including the closing of the Verdélite SPA, and explore additional financing options. However, the Company cannot provide any assurances that such additional funds will be available on reasonable terms, or at all. If the Company raises additional funds by issuing equity securities, dilution to existing stockholders would result.
On October 5, 2018, the Company entered into a Multi-Draw Credit Agreement (the “Credit Agreement”) with Emerald Health Sciences ("Sciences"), a related party (Note 9). On April 29, 2020, the Company entered into an Amended and Restated Multi-Draw Credit Agreement (the “Amended Credit Agreement”) with Sciences. As of September 30, 2022, 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 as a potential source of liquidity to the Company. The outstanding advances plus accrued interest under the Amended Credit Agreement were due on October 5, 2022 and the Company is currently within the 30 business day grace period for repayment (Note 5).
On July 8, 2022, Sciences distributed its shareholdings in EHT to 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.
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 enrollment in the Company's Phase 1 clinical study for SBI-100 Ophthalmic Emulsion ("SBI-100 OE") to the fourth quarter of 2022. The overall potential delay in the Company's drug product research and development from these types of incidents is unknown.
It is possible that the Company may encounter other similar issues relating to supply chain issues, a lack of production or laboratory 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 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 travel 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 we 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 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, as well as impacting volunteer and/or patient recruitment in Australia for clinical studies. The location of the clinical trial site is in Australia and since the COVID-19 outbreak in that country, multiple cities have experienced health emergency lockdowns which have had a negative impact on the conduct and timelines of the clinical studies.
After considering management's plans, 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 Condensed Consolidated Financial Statements do not include any adjustments that might result from the outcome of this uncertainty.
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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, and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state the information set forth herein. The 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 nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or any future periods. The Condensed Consolidated Balance Sheet as of December 31, 2021 was derived from the Company’s audited financial statements as of December 31, 2021, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on March 28, 2022. 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, which includes a broader discussion of the Company’s business and the risks inherent therein.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries SKYE Bioscience Australia and Nemus Sub. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the 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 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 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, 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 current 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, 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 as the exchange price that would be received for an asset or paid to transfer a liability (the “exit price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use 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, and the last 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.
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Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to determining 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, 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 Operations and 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 debt and equity financings as a component of equity, unless the warrants include a conditional obligation to issue a variable number of shares or there is a deemed possibility that the Company may need to settle the warrants 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 value 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 Operations and Comprehensive Loss.
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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.
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.
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The computations of basic and diluted loss per common share are as follows:
| Three Months Ended September 30, (Unaudited) | Nine Months Ended September 30, (Unaudited) | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Basic net loss per share: | |||||||||||||||||||||||
| Net loss | $ | (3,127,283) | $ | (1,824,818) | $ | (9,589,960) | $ | (6,009,362) | |||||||||||||||
| Weighted average common shares outstanding – diluted | 495,925,112 | 413,489,603 | 495,891,596 | 376,547,498 | |||||||||||||||||||
| Loss per share - basic | $ | (0.01) | $ | — | $ | (0.02) | $ | (0.02) | |||||||||||||||
| Diluted net loss per share: | |||||||||||||||||||||||
| Net loss (as adjusted) | $ | (3,127,283) | $ | (1,704,980) | $ | (9,589,960) | $ | (6,009,362) | |||||||||||||||
| Weighted average common shares outstanding – diluted | 495,925,112 | 414,461,032 | 495,891,596 | 376,547,498 | |||||||||||||||||||
| Net loss per share - diluted | $ | (0.01) | $ | — | $ | (0.02) | $ | (0.02) | |||||||||||||||
The following outstanding shares of common stock equivalents were excluded from the computation of diluted loss per share of common stock for the periods presented because including them would have been anti-dilutive:
| Three Months Ended September 30, (Unaudited) | Nine Months Ended September 30, (Unaudited) | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Stock options | 37,755,000 | 23,490,000 | 37,755,000 | 23,490,000 | |||||||||||||||||||
| Common shares underlying convertible debt | 5,661,025 | 5,303,591 | 5,661,025 | 5,303,591 | |||||||||||||||||||
| Warrants | 136,187,225 | 133,945,796 | 136,187,225 | 134,917,225 | |||||||||||||||||||
| 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.
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.
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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. As of September 30, 2022 and December 31, 2021, the Company has recognized $131,959 and $44,616, respectively, in other current assets in its Condensed Consolidated Balance Sheets.
Subsequent Events
The Company has evaluated events that have occurred after the balance sheet date but before these condensed consolidated financial statements were issued. Based upon that evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the financial statements, except as disclosed in Note 11 - Subsequent Events.
Recent Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 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.
3. Acquisition of Emerald Health Therapeutics, Inc.
On May 11, 2022, the Company entered into an Arrangement Agreement, as amended on June 14, 2022, 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). The Acquisition was completed on November 10, 2022. As of September 30, 2022, the Acquisition had not yet been completed and as such, the financial statements do not reflect the effect of the transaction.
On July 11, 2022, the Company and EHT entered into a consulting agreement pursuant to which representatives of the Company will provide administrative assistance to EHT to assist EHT in satisfying its financial reporting, operational and regulatory obligations. EHT will pay the Company $150 for each hour of services provided by the Company. The consulting agreement terminated on the date of the closing of the Acquisition (Note 11). The consulting agreement had an effective date of May 12, 2022 and as of September 30, 2022, the Company has recorded a receivable of $22,542 in other current assets - related party in the Condensed Consolidated Balance Sheets.
Under the Arrangement Agreement, the Company issued 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. On November 10, 2022, the Company issued 416,270,514 shares of stock as consideration in the Acquisition and no fractional shares of Skye Common Stock were issued (Note 11). It is expected that, for U.S. and Canadian federal income tax purposes, the Acquisition constitutes 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.
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The Company has evaluated 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 is 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. As of September 30, 2022, the realization process is in the advanced stages and EHT has laid off substantially its entire workforce and has no remaining revenue generating activities. In addition, EHT owns a vacant laboratory facility that is fully-licensed to handle controlled substances under Canadian regulations, which the Company is currently evaluating for research and development activities and to support certain manufacturing capabilities. In negotiating the Exchange Ratio, the Company performed a review of EHT's assets and the costs expected to wind down operations. However, there is inherent risk and uncertainty around what the ultimate liquidation value of EHT will be.
As of September 30, 2022, the Company deferred $1,388,444 in asset acquisition costs.
Unaudited Pro Forma Condensed Combined Balance Sheet
The following unaudited pro forma condensed combined balance sheet and related notes give effect to the Acquisition involving the Company and EHT.
The unaudited pro forma condensed combined balance sheet as of September 30, 2022 combines the Company’s and EHT’s historical unaudited balance sheets as of September 30, 2022. The unaudited pro forma condensed combined balance sheet as of September 30, 2022 is presented as if the acquisition of EHT by the Company had occurred on September 30, 2022. The transaction accounting adjustments for the acquisition consist of those necessary to account for the acquisition. In the unaudited pro forma condensed combined balance sheet, the Acquisition is accounted for as an asset acquisition in accordance with FASB ASC 805, Business Combinations, as the Company is acquiring inputs with non-substantive processes, no outputs and no assembled workforce.
Given the shift in, and wind-down of, EHT’s business as described above and in Note 3, the Company believes EHT’s historical income statements are not reflective of what the Company’s shareholders should expect from the Acquisition. Accordingly, the Company has excluded, pro forma income statements that otherwise would have been required.
Wind-down costs consist primarily of employee payroll and benefits, legal fees related to the liquidation of EHT’s assets and closing of the transaction, other professional fees for accounting, tax and audit, tax payments, the advisory fee related to the sale of the primary real estate asset, insurance, contract terminations fees and operational costs through the cease operations date at each site.
The Company estimates that EHT will incur the following costs in the periods specified below to wind-down its operations:
| Quarter ending: | (USD)* | |||||||
| December 31, 2022 | $ | 970,000 | ||||||
| March 31, 2023 | 140,000 | |||||||
| Thereafter | 40,000 | |||||||
| Total future estimated costs: | $ | 1,150,000 | ||||||
*The timing and realization of the expected costs are based on management’s estimates and are subject to change based on various factors, including but not limited to, the sale of EHT facilities at terms favorable to Skye, the timely termination of obsolete contracts, the implementation of cost-cutting measures necessary to maximize the remaining asset balance, the effective management of the termination of remaining personnel and related severance payments, the implementation of a successful transition plan, which includes the effective cessation of regulatory requirements related to operating in the cannabis industry and the successful migration of historical data.
In addition, the Company expects to incur increased operating costs post closing as a result of the Acquisition which it does not consider to be “wind-down” costs of EHT. These costs are estimated to be between $425,000 and $475,000 annually. These costs relate to the expected hiring of two EHT employees, ongoing legal and professional fees related to the listing on the Canadian Stock Exchange, increased board fees, minimum operational costs to maintain the vacant lab facility, which is not currently held for sale, and other incidental costs.
The Company excluded costs related to compensation expense that is expected to be triggered upon the closing of the Acquisition, the estimated cost of the tail insurance policy, and direct costs expected to liquidate EHT’s assets of $599,507, $193,548 and $550,000, respectively, from the wind-down costs disclosed in the table above. Such costs are included in the pro forma condensed combined balance sheet as transaction accounting adjustments.
The Company expects to incur aggregate transaction costs of $1,994,034 in connection with the Acquisition, of which $339,590 were expensed, $1,604,444 have been considered part of the transaction consideration and $50,000, representing estimated equity issuance costs, have been included as an offset to equity.
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The historical balance sheets of the Company and EHT have been adjusted in the accompanying unaudited pro forma condensed combined balance sheet to give effect to pro forma events that are transaction accounting adjustments that are necessary to account for the transaction. The pro forma adjustments are based upon available information and certain assumptions that the Company's management believes are reasonable. The assumptions underlying the pro forma adjustments in the accompanying notes are described in more detail in the notes below, which should be read in conjunction with this unaudited pro forma condensed combined balance sheet. These assumptions are based on preliminary estimates and information. Accordingly, the actual adjustments on the consolidated financial statements upon the completion of the transaction may materially differ from the pro forma adjustments.
The following unaudited pro forma condensed combined balance sheet and notes thereto is prepared for illustrative purposes only and are not necessarily indicative of or intended to represent the results that would have been achieved had the transaction been consummated as of the date indicated or that may be achieved in the future. It also may not be useful in predicting the future financial condition and results of operations of the combined company. Our actual financial condition and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
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| SKYE | EHT (US GAAP) (CAD) | EHT (Converted to U.S. GAAP and translated to USD from CAD) | Transaction Accounting Adjustments | Pro Forma Combined | |||||||||||||||||||||||||
| Note A | Notes B, C | Note D | Note E | ||||||||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||||||||
| Current assets | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 415,389 | $ | 11,196,364 | $ | 8,177,488 | $ | — | $ | 8,592,877 | |||||||||||||||||||
| Restricted cash | 4,574 | — | — | — | 4,574 | ||||||||||||||||||||||||
| Accounts receivable | — | 864,424 | 631,349 | (52,210) | (a) | 579,139 | |||||||||||||||||||||||
| Prepaid expenses | 708,477 | 1,146,140 | 837,106 | (837,106) | (a) | 708,477 | |||||||||||||||||||||||
| Deferred asset acquisition costs | 1,388,444 | — | — | (1,388,444) | (b) | — | |||||||||||||||||||||||
| Other current assets | 143,859 | — | — | — | 143,859 | ||||||||||||||||||||||||
| Other current assets - related party | 22,542 | — | — | (22,542) | (c) | — | |||||||||||||||||||||||
| Assets held for sale | — | 12,465,122 | 9,104,151 | (1,849,575) | (d) | 7,254,576 | |||||||||||||||||||||||
| Total current assets | 2,683,285 | 25,672,050 | 18,750,094 | (4,149,877) | 17,283,502 | ||||||||||||||||||||||||
| Property, plant and equipment, net | 86,163 | 1,978,872 | 1,445,309 | (1,445,086) | (e) | 86,386 | |||||||||||||||||||||||
| Operating lease right-of-use asset | 91,064 | — | — | — | 91,064 | ||||||||||||||||||||||||
| Promissory note receivable | — | 479,745 | 350,391 | (350,391) | (f) | — | |||||||||||||||||||||||
| Other asset | 8,309 | — | — | — | 8,309 | ||||||||||||||||||||||||
| Total assets | $ | 2,868,821 | $ | 28,130,667 | $ | 20,545,794 | $ | (5,945,354) | $ | 17,469,261 | |||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||||||||||||||||||
| Current liabilities | |||||||||||||||||||||||||||||
| Accounts payable | $ | 2,067,766 | $ | 1,269,523 | $ | 927,222 | $ | (22,542) | (c) | $ | 2,972,446 | ||||||||||||||||||
| Accounts payable - related parties | 120,216 | 12,355 | 9,024 | — | 129,240 | ||||||||||||||||||||||||
| Accrued interest due to related party | 305,734 | — | — | — | 305,734 | ||||||||||||||||||||||||
| Accrued payroll liabilities | 443,983 | 29,167 | 21,303 | 646,415 | (g) | 1,111,701 | |||||||||||||||||||||||
| Insurance premium loan payable | 30,615 | 253,785 | 185,357 | — | 215,972 | ||||||||||||||||||||||||
| Other current liabilities | 526,818 | 1,890,173 | 1,380,526 | 459,548 | (h) | 2,366,892 | |||||||||||||||||||||||
| Other current liabilities - related party | 102,390 | — | — | — | 102,390 | ||||||||||||||||||||||||
| Derivative liability | 326 | — | — | — | 326 | ||||||||||||||||||||||||
| Multi-draw credit agreement - related party | 450,000 | — | — | — | 450,000 | ||||||||||||||||||||||||
| Convertible multi-draw credit agreement - related party, net of discount | 2,005,371 | — | — | — | 2,005,371 | ||||||||||||||||||||||||
| Current liabilities held for sale | — | 43,811 | 31,998 | (31,998) | (i) | — | |||||||||||||||||||||||
| Operating lease liability, current portion | 92,356 | — | — | — | 92,356 | ||||||||||||||||||||||||
| Total current liabilities | 6,145,575 | 3,498,814 | 2,555,430 | 1,051,423 | 9,752,428 | ||||||||||||||||||||||||
| Non-current liabilities | |||||||||||||||||||||||||||||
| Operating lease liability, net of current portion | 8,227 | — | — | — | 8,227 | ||||||||||||||||||||||||
| Total liabilities | 6,153,802 | 3,498,814 | 2,555,430 | 1,051,423 | 9,760,655 | ||||||||||||||||||||||||
| Stockholders’ equity | |||||||||||||||||||||||||||||
Common stock, $0.001 par value; 5,000,000,000 shares authorized; 912,187,027 shares issued and outstanding at September 30, 2022 | 495,925 | — | — | 416,271 | (j) | 912,196 | |||||||||||||||||||||||
| Additional paid-in-capital | 53,065,217 | 281,379,472 | 205,511,125 | (194,643,023) | (k) | 63,933,319 | |||||||||||||||||||||||
| Accumulated other comprehensive income | — | 114,115 | 83,346 | (83,346) | (l) | — | |||||||||||||||||||||||
| Accumulated deficit | (56,846,123) | (256,861,734) | (187,604,107) | 187,313,321 | (l) | (57,136,909) | |||||||||||||||||||||||
| Total stockholders’ equity | (3,284,981) | 24,631,853 | 17,990,364 | (6,996,777) | 7,708,606 | ||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 2,868,821 | $ | 28,130,667 | $ | 20,545,794 | $ | (5,945,354) | $ | 17,469,261 | |||||||||||||||||||
See notes to the unaudited pro forma condensed combined balance sheet.
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Notes to the Unaudited Pro Forma Condensed Combined Balance Sheet
Basis of Presentation
The unaudited pro forma condensed combined balance sheet as of September 30, 2022 assumes that the acquisition was completed on September 30, 2022.
The unaudited pro forma condensed combined balance sheet is presented for informational purposes only and is not necessarily indicative of the combined financial position had the acquisition occurred as of the dates indicated, nor is it meant to be indicative of any anticipated combined financial position that the Resulting Issuer will experience after the completion of the acquisition.
EHT’s unaudited condensed consolidated balance sheet was prepared in accordance with IFRS as issued by the IASB and is presented in Canadian dollars. Adjustments made to translate the historical condensed combined balance sheet of EHT from Canadian dollars (“CAD”) to US dollars (“USD”) and convert the historical condensed combined balance sheet of EHT from IFRS to GAAP, as issued by FASB, are discussed in greater detail in Note C.
Pro forma adjustments reflected in the unaudited pro forma condensed combined balance sheet are based on items that are factually supportable and directly attributable to the acquisition. The unaudited pro forma condensed combined balance sheet does not reflect the cost of any integration activities or benefits from the acquisition.
Pro Forma Adjustments
The following pro forma adjustments give effect to the acquisition.
Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 2022
| Note A | Derived from the unaudited condensed consolidated financial statements of Skye as of September 30, 2022, as contained in this Form 10-Q. | ||||
| Note B | Derived from the unaudited condensed interim consolidated financial statements of EHT as of September 30, 2022. | ||||
| Note C | Management determined that no adjustments were needed in order to convert the unaudited condensed interim consolidated financial statements of EHT as of September 30, 2022 from IFRS to US GAAP for the purpose of the pro forma financial information. | ||||
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| Note D | Derived from the unaudited condensed interim consolidated financial statements of EHT as of September 30, 2022 and translated from Canadian dollars (“C$”) to USD. The indicated exchange rate used to translate C$ to USD at September 30, 2022 was the rate of 0.73037 as set out in the table below. | ||||
| EHT | Exchange | EHT | |||||||||||||||
| (Converted to U.S. GAAP) | Rate | (Converted to U.S. GAAP) | |||||||||||||||
| (CAD) | 0.73037 | (USD) | |||||||||||||||
| ASSETS | |||||||||||||||||
| Current | |||||||||||||||||
| Cash and cash equivalents | $ | 11,196,364 | $ | 8,177,488 | |||||||||||||
| Accounts receivable | 864,424 | 631,349 | |||||||||||||||
| Prepaid expenses | 1,146,140 | 837,106 | |||||||||||||||
| Assets held for sale | 12,465,122 | 9,104,151 | |||||||||||||||
| Total current assets | 25,672,050 | 18,750,094 | |||||||||||||||
| Property, Plant and equipment, net | 1,978,872 | 1,445,309 | |||||||||||||||
| Promissory note receivable | 479,745 | 350,391 | |||||||||||||||
| Total assets | $ | 28,130,667 | $ | 20,545,794 | |||||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||||||
| Current liabilities | |||||||||||||||||
| Accounts payable and accrued liabilities | $ | 1,269,523 | $ | 927,222 | |||||||||||||
| Accounts payable - related parties | 12,355 | 9,024 | |||||||||||||||
| Accrued payroll liabilities | 29,167 | 21,303 | |||||||||||||||
| Other current liabilities | 1,890,173 | 1,380,526 | |||||||||||||||
| Insurance premium loan payable | 253,785 | 185,357 | |||||||||||||||
| Current liabilities held for sale | 43,811 | 31,998 | |||||||||||||||
| Total current liabilities | 3,498,814 | 2,555,430 | |||||||||||||||
| SHAREHOLDERS' EQUITY | |||||||||||||||||
| Additional paid-in-capital | 281,379,472 | 205,511,125 | |||||||||||||||
| Accumulated other comprehensive income | 114,115 | 83,346 | |||||||||||||||
| Accumulated deficit | (256,861,734) | (187,604,107) | |||||||||||||||
| TOTAL SHAREHOLDERS' EQUITY | 24,631,853 | 17,990,364 | |||||||||||||||
| TOTAL LIABILITIES AND EQUITY | $ | 28,130,667 | $ | 20,545,794 | |||||||||||||
| Note E | The transaction accounting adjustments are summarized as follows: | ||||
a.Accounts receivable and prepaid expense, are reduced to reflect adjustments to estimated fair value to Skye.
b.Deferred asset acquisition costs, are reclassified to the assets acquired as part of the total purchase consideration.
c.Other current assets - related party, from the consulting agreement entered into with EHT were eliminated against Accounts payable.
d.Assets held for sale, is decreased by estimated direct costs to liquidate EHT’s assets of $550,000, including legal costs, advisory fees and other professional fees. In addition, assets held for sale were reduced by $1,299,575 to reflect the fair value to Skye.
e.Property plant and equipment, is adjusted based on a relative fair value allocation to reflect the amount of consideration attributable to the vacant lab facility which management of SKYE plans to evaluate and currently has no current plans to liquidate.
f.Promissory note receivable, is reduced to reflect adjustments to estimated fair value to Skye.
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g.Accrued payroll liabilities, is adjusted to reflect (i) the severance provision in EHT’s COO’s executive employment agreement which provides for total payments in the amount of $438,222, (ii) an in-substance severance arrangement, with a former member of the Skye's Board of Directors which provides for total payments in the amount of $78,693, and (iii) transaction bonuses payable to Skye's CEO and CFO aggregating $129,500.
h.Other current liabilities, is adjusted to reflect the accrual for estimated transaction costs of $216,000, the accrual for equity issuance costs of $50,000 and an estimate of $193,548 for the tail insurance policy for the benefit of the EHT directors and officers.
i.Current liabilities held for sale, were reduced by the amount of the remaining lease liability related to the Richmond lease which is expected to be terminated prior to closing.
j.Common stock, is increased by $416,271 to reflect the par value ($0.001) of 416,270,514 Skye shares expected to be issued as consideration for all the outstanding shares of EHT. The Company's shares were valued at $0.026 per share or $10,823,033. Common stock is also increased by the issuance of convertible securities for an aggregate fair value of $428,747 and transaction costs of $1,604,444 (the “Purchase Consideration”). The following table summarizes the relative fair value allocation for the preliminary purchase price as of the acquisition date as if the acquisition was accounted for as an asset acquisition.
| EHT relative fair value allocation: | September 30, 2022 | |||||||
| Purchase Consideration | ||||||||
| Common stock | $ | 10,823,033 | ||||||
| Stock options issued | 114,249 | |||||||
| Warrants issued | 314,498 | |||||||
| Transaction costs | 1,604,444 | |||||||
| Total consideration | $ | 12,856,224 | ||||||
| Assets acquired | ||||||||
| Cash and cash equivalents | $ | 8,177,488 | ||||||
| Accounts receivable | 579,139 | |||||||
| Property, plant and equipment | 223 | |||||||
| Current assets held for sale (property, plant and equipment) | 7,254,576 | |||||||
| Accounts payable | (927,222) | |||||||
| Accrued payroll liabilities | (459,525) | |||||||
| Other current liabilities | (1,380,526) | |||||||
| Insurance Payable | (378,905) | |||||||
| Accounts payable - related parties | (9,024) | |||||||
| Total net assets acquired | $ | 12,856,224 | ||||||
k.Additional paid-in capital is adjusted to reflect the following:
(i) The total value of the shares of common stock expected to be issued as consideration for the Acquisition of $10,823,033 less the associated par value of $416,271 recorded in Common stock (“j” above) and less equity issuance costs of $50,000.
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(ii) The estimated fair value of warrants issued as consideration for the Acquisition in the amount of $314,498. These warrants represent EHT warrants outstanding as of September 30, 2022 which will be converted into warrants to purchase shares of SKYE common stock at the agreed-upon exchange ratio of 1.95. The chart below summarizes the details of these warrants:
| EHT Warrants | EHT Exercise Price (CAD) | Number of EHT Warrants Outstanding | Adjusted Exercise Price (USD) | Term (Years) | Number of SKYE Warrants Issued and Outstanding | |||||||||||||||||||||||||||
| November 2019 | $ | 0.75 | 4,385,965 | $ | 0.28 | 5 | 8,552,630 | |||||||||||||||||||||||||
| December 2019 | $ | 0.385 | 5,172,942 | $ | 0.14 | 5 | 10,087,236 | |||||||||||||||||||||||||
| February 2020 | $ | 0.385 | 7,596,551 | $ | 0.14 | 5 | 14,813,272 | |||||||||||||||||||||||||
| February 2020 | $ | 0.385 | 2,748,276 | $ | 0.14 | 5 | 5,359,137 | |||||||||||||||||||||||||
| June 2020 | $ | 0.27 | 11,351,351 | $ | 0.10 | 5 | 22,135,132 | |||||||||||||||||||||||||
| 31,255,085 | 60,947,407 | |||||||||||||||||||||||||||||||
The assumptions used to value these warrants are as follows:
| September 30, 2022 | ||||||||
| Dividend yield | 0.00% | |||||||
| Volatility | 100.6 - 120.4% | |||||||
| Risk-free interest rate | 3.96 - 4.23% | |||||||
| Expected term (years) | 0.67 - 2.38 | |||||||
(iii) The estimated fair value of options issued as consideration for the Acquisition in the amount of $114,249. These options represent EHT options outstanding as of September 30, 2022 totaling 4,247,500, which will be converted into options to acquire shares of SKYE common stock at the agreed-upon exchange ratio of 1.95 for a total of 8,282,626 SKYE options. The assumptions to value these options are as follows:
| September 30, 2022 | ||||||||
| Dividend yield | 0.00% | |||||||
| Volatility | 89.45 - 126.82% | |||||||
| Risk-free interest rate | 2.79 - 4.25% | |||||||
| Expected term (years) | 0.06 - 4.94 | |||||||
(iv) The grant date fair value of $82,592 for one of two tranches of a stock option grant to a former member of the SKYE Board of Directors that provides for 2,000,000 shares of SKYE common stock, subject to an exercise contingency related to the satisfaction of a performance based provision tied to closing of the acquisition. This tranche meets the criteria for equity classification.
(v) The elimination of the historical equity of EHT.
l.Accumulated other comprehensive income and Accumulated deficit are adjusted to reflect the elimination of the remaining historical equity balances of EHT as well as the applicable effects of the acquisition transactions as presented above.
4. 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. 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 (Note 2).
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Warrants
Warrants vested and outstanding as of September 30, 2022 are summarized as follows:
| Source | Exercise Price | Term (Years) | Number of Warrants Outstanding | |||||||||||||||||
| Pre 2015 Common Stock Warrants | $ | 1.00 | 10 | 1,110,000 | ||||||||||||||||
| 2015 Common Stock Warrants | 5.00 | 10 | 100,000 | |||||||||||||||||
| 2016 Common Stock Warrants to Service Providers | 1.15 | 10 | 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 | 0.35 | 5 | 8,000,000 | |||||||||||||||||
| 2020 Common Stock Warrants to Placement Agent | 0.08 | 5 | 8,166,667 | |||||||||||||||||
| 2021 Inducement Warrants | 0.15 | 5 | 21,166,667 | |||||||||||||||||
| 2021 Inducement Warrants to Placement Agent | 0.19 | 5 | 1,481,667 | |||||||||||||||||
| 2021 Common Stock Warrants | 0.09 | 5 | 77,777,779 | |||||||||||||||||
| 2021 Common Stock Warrants to Placement Agent | 0.11 | 5 | 5,444,445 | |||||||||||||||||
| 2022 Common Stock Warrants to Service Provider | 0.04 | 2 | 2,000,000 | |||||||||||||||||
| Total warrants outstanding as of September 30, 2022 | 136,187,225 | |||||||||||||||||||
As of September 30, 2022, all of the Company's warrants are fully vested with the exception of the "2022 Common Stock 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:
| 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 | |||
Derivative Liability
The following tables summarize the activity of the derivative liability for the periods indicated:
| Nine Months Ended September 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 | September 30, 2022 Fair Value of Derivative Liability | |||||||||||||||||||||||||
| Emerald Financing - warrant liability | $ | 59,732 | $ | — | $ | (59,406) | $ | — | $ | 326 | |||||||||||||||||||
| Current balance of derivative liability | $ | 59,732 | $ | — | $ | (59,406) | $ | — | $ | 326 | |||||||||||||||||||
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| Nine Months Ended September 30, 2021 | |||||||||||||||||||||||||||||
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 | September 30, 2021 Fair Value of Derivative Liability | |||||||||||||||||||||||||
| Emerald Financing - warrant liability | $ | 38,567 | $ | — | $ | 169,349 | $ | — | $ | 207,916 | |||||||||||||||||||
| Total derivative liability | $ | 38,567 | $ | — | $ | 169,349 | $ | — | $ | 207,916 | |||||||||||||||||||
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 contain a contingent put option if the Company undergoes a subsequent financing that results in a change in control. The warrant holders also have 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 dates using the following assumptions:
| September 30, 2022 | December 31, 2021 | ||||||||||
| Dividend yield | — | % | — | % | |||||||
| Volatility factor | 93.3 | % | 126.5 | % | |||||||
| Risk-free interest rate | 2.79 | % | 0.43 | % | |||||||
| Expected term (years) | 0.38 | 1.13 | |||||||||
| Underlying common stock price | $ | 0.03 | $ | 0.05 | |||||||
5. Debt
Multi-Draw Credit Agreement- Related Party
The Company’s Debt with Sciences consists of the following:
| Conversion Price | As of September 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 | (8,535) | (487,668) | |||||||||||||||
| Unamortized debt issuance costs | (594) | (1,927) | |||||||||||||||
| Carrying value of total convertible debt - related party | 2,005,371 | 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 | $ | 2,455,371 | $ | 1,974,905 | |||||||||||||
On October 5, 2018, the Company entered into the Credit Agreement with Sciences, a related party (Note 9). On 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.
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On March 29, 2021, the Company amended the Amended Credit Agreement to defer interest payments through the earlier of maturity or prepayment of the principal balance. On September 15, 2021, the Company further amended the Amended Credit Agreement to close the disbursement line. The amendments were considered a modification for accounting purposes.
Advances under the Amended Credit Agreement are unsecured, and bear interest at an annual rate of 7% and mature on October 5, 2022 (Note 11). The Company is currently within the 30 business day grace period which expires on November 17, 2022. At Sciences’ election, 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 Amended Credit Agreement provides for customary events of default which may result in the acceleration of the maturity of the advances in addition to, but not limited to, cross acceleration to certain other indebtedness 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, the Company has agreed to issue to Sciences warrants to purchase shares of common stock in an amount 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 (Note 4).
As of September 30, 2022, the unamortized debt discount on the convertible advances will be amortized over a remaining period of 0.01 years. As of September 30, 2022, the fair value of the shares underlying the convertible advances under the Amended Credit Agreement was $130,943. As of September 30, 2022, the if-converted value did not exceed the principal balance.
Insurance premium loan payable
On February 28, 2022, the Company entered into an annual financing arrangement for a portion of its Directors and Officers Insurance Policy (the “D&O Insurance”) with Marsh & McLennan in an amount of $275,537. The loan is payable in equal monthly installments of $31,149, matures on October 28, 2022 and bears interest at a rate 4.17% per annum. As of September 30, 2022, a total of $132,028 and $30,615, remains financed in prepaid expenses and loans payable, respectively.
Interest Expense
The Company’s interest expense consists of the following:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Related party interest expense – stated rate | $ | 44,086 | $ | 44,086 | $ | 130,824 | $ | 130,824 | |||||||||||||||
| Insurance premium loan payable - stated rate | 1,602 | — | 4,273 | — | |||||||||||||||||||
| PPP loan interest expense – stated rate | — | — | — | 445 | |||||||||||||||||||
| Non-cash interest expense: | |||||||||||||||||||||||
| Amortization of debt discount | 165,082 | 150,852 | 479,133 | 437,834 | |||||||||||||||||||
| Amortization of transaction costs | 459 | 420 | 1,333 | 1,219 | |||||||||||||||||||
| $ | 211,229 | $ | 195,358 | $ | 615,563 | $ | 570,322 | ||||||||||||||||
6. Stockholders’ Equity and Capitalization
Warrant Exercises
During the nine months ended September 30, 2022, 19,666,667 pre-funded warrants with an intrinsic value of $1,178,033 were exercised in exchange for 19,666,667 shares of common stock for gross proceeds of $1,967.
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Common Stock Issuance
On March 2, 2022, the Company released 150,000 shares of common stock to a service provider (Note 7).
7. 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”).
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 approved by the shareholders. The 2014 Amended and Restated 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 September 30, 2022, the Company had 47,514,820 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 nine months ended September 30, 2022:
| 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 | |||||||||||||||||
| Granted | 4,350,000 | 0.04 | |||||||||||||||||||||
| Exercised | — | — | |||||||||||||||||||||
| Cancelled | (321,250) | 0.06 | |||||||||||||||||||||
| Forfeited | (1,678,750) | 0.08 | |||||||||||||||||||||
| Outstanding, September 30, 2022 | 37,755,000 | $ | 0.07 | 8.45 | $ | — | |||||||||||||||||
| Exercisable, September 30, 2022 | 14,782,500 | $ | 0.08 | 7.81 | $ | — | |||||||||||||||||
The weighted-average grant-date fair value of stock options granted during the nine months ended September 30, 2022 was $0.04.
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:
| Nine Months Ended September 30, 2022 | |||||
| Dividend yield | — | % | |||
| Volatility factor | 126.3 - 132.6% | ||||
| Risk-free interest rate | 2.89 - 3.60% | ||||
| Expected term (years) | 5.00 - 6.08 | ||||
29
Stock Option Awards with Performance and Other Conditions
During the nine months ended September 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 was not deemed probable for accounting purposes as of September 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 September 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 September 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 September 30, 2022, 4,000,000 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 2014 Amended and Restated Plan during the nine months ended September 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, September 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), and the RSUs discussed above, in its Condensed Consolidated Statements of Operations and Comprehensive Loss as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Research and development | $ | 23,966 | $ | 17,986 | $ | 64,507 | $ | 37,350 | |||||||||||||||
| General and administrative | 120,158 | 470,987 | 361,339 | 709,902 | |||||||||||||||||||
| $ | 144,124 | $ | 488,973 | $ | 425,846 | $ | 747,252 | ||||||||||||||||
The total amount of unrecognized compensation cost was $1,217,236 as of September 30, 2022. This amount will be recognized over a weighted average period of 3.65 years.
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2022 Employee Stock Purchase Plan
In June 2022, the Company's board of directors approved the 2022 Employee Stock Purchase Plan (the "ESPP"). Under which the Company will offer eligible employees the option to purchase common stock at a 15% discount to the lower of 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 was approved by the Company's stockholders on September 30, 2022.
8. 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 September 30, 2022, 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 September 30, 2022, none of the other milestones under these license agreements have been met.
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.
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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.
The agreement was terminated effective January 8, 2022 pursuant to a termination notice provided to UM by the Company on November 9, 2021, and none of the milestones under this license agreement were met.
9. 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 as of September 30, 2022 and has provided the Company with financing under the Amended Credit Agreement (Note 5).
On December 19, 2019, the Company entered into an Independent Contractor Services Agreement with Dr. Avtar Dhillon, at the time a member of Sciences Board of Directors and its CEO, 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.
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 nine months ended September 30, 2022. Under this agreement, for the three and nine months ended September 30, 2021, the Company incurred fees of $30,000 and $90,000, respectively.
On May 18, 2022, Jim Heppell resigned from the Company's board of directors and concurrently entered into a consulting agreement with the Company pursuant to which Mr. Heppell will provide services mutually agreed upon by the Company. The consulting agreement has 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. Under the consulting agreement, Mr. Heppell is entitled to a monthly fee of $6,300, which will be increased to $16,600 per month upon the closing of the Acquisition. The consulting agreement provides Mr. Heppell with a termination payment in an amount equal to the monthly fees through the then-remaining term of the agreement if Mr. Heppell’s engagement is 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). The Company has accounted for the consulting contract as an in-substance severance arrangement and recognized $0 and $75,600 in severance expense during the three and nine months ended September 30, 2022. The accrual for Mr. Heppell's severance will be adjusted to include the increased fee payments when the Company determines that the closing of the Acquisition is probable. As of September 30, 2022, the Company recognized $6,300, in accounts payable - related party and $47,555 in other current liabilities - related party under this consulting agreement.
As of September 30, 2022, Mr. Heppell is a board member of Emerald Health Pharmaceuticals, Inc. and EHT (Note 3). As of September 30, 2022, Sciences owns 23% and 48% of the Company and Emerald Health Pharmaceuticals, Inc., respectively. As of September 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.
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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 two 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 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. For the three months ended September 30, 2022 and 2021, the Company incurred $0 and $73,678, respectively, in expenses under the Collaborative Research Agreements. For the nine months ended September 30, 2022 and 2021, the Company incurred $87,926 and $143,278, respectively, in expenses under the Collaborative Research Agreements. As of December 31, 2021, the Company recognized prepaid asset in the amount of $8,056.
On October 11, 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. 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, and 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 nine months ended September 30, 2022, the Company incurred $50,000 and $150,000, respectively, in research and development expenses related to the retainer under the ESRA. As of September 30, 2022 and December 31, 2021, the Company has recognized $50,000 and $5,376 in accounts payable - related parties and prepaid expense - related party, 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 nine months ended September 30, 2022, the Company incurred $47,000 and $167,000, respectively of research and development expenses under the ESRA. As of September 30, 2022, the Company recognized $54,835, in other current liabilities - related parties related to the first research project. As of September 30, 2022, the Company recognized $63,916, in accounts payable - related parties under this agreement.
Management Conflicts
As of September 30, 2022, the Company's CEO Punit Dhillon, is a board member of the Company and EHT (Note 3 & 11). Mr. Dhillon also served as a board member of Sciences, VivaCell and , Emerald Health Pharmaceuticals, Inc. ("EHP") until he tendered his resignation from such boards on August 10, 2020, September 22, 2021 and August 19, 2022, respectively. On July 8, 2022, Punit Dhillon was appointed to serve as the interim principal executive officer of EHP under a consulting arrangement (Note 11). On October 28, 2022, Mr. Dhillon resigned as the interim principal executive officer of EHP and the consulting arrangement was terminated.
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 $73 per hour. The consulting agreement may be terminated by either party upon providing 15 days of advance notice. For the nine months ended September 30, 2022, the Company incurred $8,595, in consulting expenses in general and administrative expenses under this agreement. No expense was incurred under this agreement during the three months ended September 30, 2022. As of September 30, 2022, the Company recorded $10,779 to deferred asset acquisition cost related to this consulting agreement.
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10. 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 lease is effective from September 1, 2021 through October 31, 2023 and contains a renewal option for a two-year extension after the current expiration date. The Company does not expect that 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 includes 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.
For the three and nine months ended September 30, 2022 and 2021 lease expense comprised of $22,675 and $7,558, and $68,026 and $7,558, 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:
| September 30, 2022 | |||||
| Weighted-average remaining term – operating lease (in years) | 1.08 | ||||
| Weighted-average discount rate – operating lease | 12 | % | |||
Future minimum lease payments as of September 30, 2022 are presented in the following table:
| Year: | |||||
| 2022 | $ | 24,686 | |||
| 2023 | 83,093 | ||||
| Total future minimum lease payments: | 107,779 | ||||
| Less imputed interest | (7,196) | ||||
| Total | $ | 100,583 | |||
Reported as:
| Operating lease liability | $ | 92,356 | |||
| Operating lease liability, net of current portion | 8,227 | ||||
| Total lease liability | $ | 100,583 | |||
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.
As of September 30, 2022, the Company is party to a legal proceeding with a former employee alleging wrongful termination. Due to the stage of the proceedings as of September 30, 2022, the Company is unable to estimate the potential contingency as the outcome remains uncertain. The Company is expensing the legal costs related to this proceeding as incurred.
11. Subsequent Events
Loan Agreement with EHT
On October 17, 2022, Skye and EHT entered into a loan agreement (the “Loan Agreement”) pursuant to which EHT loaned Skye USD$700,000 (the “Loan”) in accordance with the terms of a promissory note (“Note”). Skye intends to use the proceeds from the Loan for general working capital purposes.
The Loan is unsecured and will accrue simple interest from October 17, 2022, until paid at an interest rate of 12% per annum, provided, however, that upon closing of the Acquisition, such interest rate has been reduced to 5% per annum.
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The entire outstanding principal amount of the Loan and applicable interest accrued matures in full on October 17, 2023.
As required under the Skye's amended and restated multi-draw credit facility, Skye has obtained a waiver from Emerald Health Sciences, Inc. to incur debt under the Loan.
Acquisition of EHT
On November 7, 2022, EHT agreed to waive the requirement to obtain a conditional letter from the CSE and the Acquisition closed on November 10, 2022. The Company has covenanted to use its best efforts to continue to pursue the CSE listing subsequent to the closing date. (See Note 3 Acquisition of EHT for more information).
Sale of Verdélite
On November 10, 2022, EHT, C3 Souvenir Holding, Inc., a corporation governed under the Canada Business Corporations Act ("Purchaser"), Verdélite Sciences, Inc. ("Verdélite"), Verdélite Property Holdings, Inc. ("VPHI") entered into a stock purchase agreement (the "Verdélite SPA") effective November 8, 2022, pursuant to which Purchaser will acquire all of the outstanding shares of Verdélite, the holder of EHT's most significant real estate asset, for an aggregate purchase price of approximately USD$9,312,000, subject to certain adjustments. Prior to the closing of the Acquisition, VPHI was wound up into Verdélite and Verdélite is a wholly owned subsidiary of EHT. The terms of the Verdélite SPA provide for an upfront, non refundable deposit, except in the case of material breach, in the amount of approximately $548,000, which as already been received by EHT. The remainder of the purchase price will be paid as follows, (i) approximately $6,026,000 to be paid on the closing date of the Verdélite SPA, (ii) three equal installments of approximately $913,000 to be paid on each of the 18-month ("Term 1"), 30-month ("Term 2"), and 42 month ("Term 3") anniversaries of the closing date.
Annual compounded interest on the loan receivable will be payable at the end of Term 3 and will accrue at a rate equal to the Prime Rate set by the Bank of Montreal plus 1.55%, 3.55% and 5.55% per annum for Term 1, Term 2 and Term 3, respectively. The Purchaser has the option to prepay the principal term payments in full at any time during Term 1 or Term 2. If prepayment occurs, the interest rate will be retrospectively adjusted to the Prime Rate plus 1.55%, compounded annually, until the installment payments are paid in full.
The balance of the purchase price after closing will be secured against the assets and stock of the Purchaser.
The Verdélite SPA contains customary closing conditions including, but not limited to, the completion of an environmental audit by EHT.
The foregoing description of the Verdelite SPA do not purport to be complete and are qualified in their entirety by reference to the text of the Verdelite SPA which is attached as exhibit 10.3 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.
Management Conflicts
On October 28, 2022, the Company's CEO, Punit Dhillon, tendered his resignation as principal executive officer of EHP. As such, Mr. Dhillon is no longer affiliated with EHP.
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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 Statements (unaudited) for the three and nine months ended September 30, 2022 and 2021 (unaudited) 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. 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” 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."), an Australian proprietary limited company.
About Skye Bioscience, Inc.
We are a preclinical pharmaceutical company focused on the discovery, development and commercialization of a novel class of cannabinoid derivatives 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 novel cannabinoid derivatives through our own directed research efforts and multiple license agreements. We have retained Novotech as our contract research organization "CRO" in Australia and expect to commence a Phase 1 trial in the fourth quarter of 2022. We are also working towards filing our IND for SBI-100 by year end in anticipation of the start of our Phase 2 clinical trial in 2023.
On May 11, 2022, we entered into an Arrangement Agreement (as amended, 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 agreed to acquire all of the issued and outstanding common shares of EHT (the “EHT Shares”) pursuant to a plan of arrangement under the Business Corporations Act (British Columbia) (the “Acquisition”). On November 7, 2022, EHT and the Company agreed to waive the mutual closing condition requiring the Company to obtain conditional approval from the Canadian Stock Exchange to list the common stock of the Company. The Acquisition was consummated on November 10, 2022. Under the terms of the Arrangement Agreement and the Plan of Arrangement, on November 10, 2022, each shares of EHT common stock (“EHT Shares”) outstanding immediately prior to the effective time of the Acquisition (the “Effective Time”) was transferred to the Company in exchange for 1.95 shares (the “Exchange Ratio”) of Company common stock. The cash and assets of EHT acquired in the Acquisition will be used to fund our Phase 1 and Phase 2 clinical trials. EHT is currently in the advanced stages of its 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.
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.
In June 2022, we received approval from Belberry Limited, a certified Australian Human Research Ethics Committee, to begin our Phase 1 clinical trial for the study of our lead product candidate, SBI - 100 OE. We subsequently notified the Australian Therapeutics Goods Administration of our intent to initiate our Phase 1 clinical trial through the Clinical Trial Notification scheme. In connection with this approval to initiate the first-in-human trial for SBI-100 by a governmental regulatory authority, we triggered the first milestone payment under our license agreement for UM 5050 with UM.
In addition, during September of 2022 we completed the manufacture of the clinical trial material, SBI - 100 OE, for our Phase 1 clinical trial which is expected to commence before the end of 2022.
During the quarter ended September 30, 2022, we initiated the manufacture of the active pharmaceutical ingredient to be used in our Phase 2 clinical trial. We obtained feedback from the FDA during our pre-IND meeting that we may commence our Phase 2 trial in the United States without having conducting a Phase 1 study. We expect to begin our Phase 2 trial in the first half of 2023.
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General Trends and Outlook
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 may 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 of September 30, 2022, had a working capital deficit of $3,462,290 and an accumulated deficit of $56,846,123. As of September 30, 2022, we had unrestricted cash in the amount of $415,389. For the three and nine months ended September 30, 2022 and 2021, we incurred losses from operations of $2,922,282 and $1,819,109, and 9,028,662 and 5,386,044, respectively. For the three and nine months ended September 30, 2022 and 2021, we incurred net losses of $3,127,283 and $1,824,818, and $9,589,960 and $6,009,362, respectively. We expect to continue to incur significant losses through 2022 and expects to incur significant losses and negative cash flows from operations in the future.
Critical Accounting Policies and Estimates
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these 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 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 financial statements include estimates and judgements as to the appropriate carrying values of our equity instruments, derivative liability, debt with embedded features, clinical accruals and the valuation of our stock based compensation awards, which are not readily apparent from other sources. We consider certain accounting policies related to fair value measurements, convertible instruments, warrants issued in connection with financings, stock-based compensation expense and earnings per share 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 nine months ended September 30, 2022 (Note 2).
Recently Issued and Adopted Accounting Pronouncements
See Note 2 to the accompanying 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.
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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 residual global impacts from the COVID-19 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.
Three months ended September 30, 2022 and 2021
Research and Development Expenses
Research and development expenses included the following:
| • | license fees; | |||||||
| • | 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. Our application to administer our lead drug candidate, SBI-100 OE, in human subjects has been submitted and approval was obtained by Belberry Limited, an Australian Human Research Ethics Committee (HREC) during the second quarter of 2022 and during the quarter ended September 30, 2022, we completed the production of SBI-100 OE clinical trial material for our Phase 1 study. We have received authorization from a certified Human Research Ethics Committee in Australia and appropriately notified the Australian Therapeutics Goods Administration that we intend to commence the Phase 1 clinical trial. We expect to initiate enrollment in our first-in-human study during the fourth quarter of 2022.
Below is a summary of our research and development expenses during the three months ended September 30, 2022 and 2021:
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change 2022 vs. 2021 | % Change 2022 vs. 2021 | |||||||||||||||||||||||
| Research and development expenses | $ | 1,781,724 | $ | 327,731 | $ | 1,453,993 | 444 | % | ||||||||||||||||||
Research and development expenses for the three months ended September 30, 2022 increased by $1,453,993 as compared to the three months ended September 30, 2021. The increase in research and development expenses was primarily due to an increase in contract research and development activities, including $1,400,531 for the manufacturing of our Phase 1 clinical trial material for SBI-100 OE and the manufacture of API for our Phase 2 study. In addition, the Australian regulatory approval triggered a license fee milestone payment to UM for regulatory approval in Australia of $100,000. This increase was offset by a decrease in consulting fees of $56,696.
General and Administrative Expenses
Below is a summary of general and administrative expenses for the three months ended September 30, 2022 and 2021:
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change 2022 vs. 2021 | % Change 2022 vs. 2021 | |||||||||||||||||||||||
| General and administrative expenses | $ | 1,140,558 | $ | 1,491,378 | $ | (350,820) | (24) | % | ||||||||||||||||||
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General and administrative expenses for the three months ended September 30, 2022 decreased by $350,820 as compared to the three months ended September 30, 2021. The decrease in general and administrative expenses was primarily due to a decrease in stock compensation expense of $278,321 related to the acceleration of a vesting provision and the extension of the post termination exercise period for two stock option awards that were modified in connection with the termination of a consultant which resulted in higher stock compensation expense during the three months ended September 30, 2021, as compared to the three months ended September 30, 2022. Decreases in general and administrative expenses also included decreases in consulting fees of $61,467, a decrease in employee wages of $82,360 related to a change in estimate in bonus accruals, decreases in investor relations expenses of $100,535 and decrease in recruiting fees of $49,120. The aggregate decrease was offset by increases of approximately $181,000 and $55,351 in employee salaries due to increases in headcount and software expenses, respectively.
Other Expense (Income)
Below is a summary of other expense (income) during the three months ended September 30, 2022 and 2021:
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change 2022 vs. 2021 | % Change 2022 vs. 2021 | |||||||||||||||||||||||
| Change in fair value of derivative liabilities | $ | (6,228) | $ | (189,649) | $ | 183,421 | (97) | % | ||||||||||||||||||
| Interest expense | 211,229 | 195,358 | 15,871 | 8 | % | |||||||||||||||||||||
| Total other expense | $ | 205,001 | $ | 5,709 | $ | 199,292 | 3491 | % | ||||||||||||||||||
For the three months ended September 30, 2022, we had net other expense of $205,001 related to interest expense and a gain from the change in fair value of our warrant liability. When comparing the three months ended September 30, 2022 and 2021, total other expense increased by $199,292. Gains and losses from the change in fair value of our derivative liabilities are due primarily to fluctuations in our stock price and our volatility during each period. The 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 September 30, 2022, as compared to the period ended September 30, 2021.
Nine months ended September 30, 2022 and 2021
Below is a summary of our research and development expenses during the nine months ended September 30, 2022 and 2021:
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change 2022 vs. 2021 | % Change 2022 vs. 2021 | |||||||||||||||||||||||
| Research and development expenses | $ | 4,474,531 | $ | 1,818,059 | $ | 2,656,472 | 146 | % | ||||||||||||||||||
Research and development expenses for the nine months ended September 30, 2022 increased by $2,656,472 as compared to the nine months ended September 30, 2021. The increase in research and development expenses was primarily due to an increase in contract research and development activities, including $1,879,964 for the manufacturing of our Phase 1 clinical trial material for SBI-100 OE, the manufacture of API for our Phase 2 study and contracted site initiation costs for our Phase 1 clinical study. In addition, we incurred $113,717 in expense for the use of specialized consultants, had increased costs related to lab supplies and materials of $45,964, an increase in compensation cost of $467,370 due to bonus expense and additional headcount from the addition of regulatory and development personnel, an increase in software of $31,637 and an increase in license fees from meeting the first milestone under our license agreement with UM.
General and Administrative Expenses
Total general and administrative expenses for the nine months ended September 30, 2022 and 2021, were as follows:
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change 2022 vs. 2021 | % Change 2022 vs. 2021 | |||||||||||||||||||||||
| General and administrative expenses | $ | 4,554,131 | $ | 3,567,985 | $ | 986,146 | 28 | % | ||||||||||||||||||
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General and administrative expenses for the nine months ended September 30, 2022 increased by $986,146 as compared to the nine months ended September 30, 2021. The increase in general and administrative expenses was primarily due to an increase in employee wages and board fees of $422,584 related to the hiring of our chief financial officer and the addition of two board members. Additionally, there were increases in professional and legal fees of $794,893 related primarily to preliminary diligence costs associated with the EHT Acquisition which were expensed as incurred during the first quarter and general legal fees, an increase in software expense of $113,596, and an increase in facilities and rent expense of $72,164. The aggregate increase was offset by decreases of $234,490 and 159,789 and $54,244 in investor relations expenses, consulting and recruiting expenses, respectively.
Other Expense (Income)
Total other expense (income) for the nine months ended September 30, 2022 and 2021, was as follows:
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | $ Change 2022 vs. 2021 | % Change 2022 vs. 2021 | |||||||||||||||||||||||
| Change in fair value of derivative liabilities | $ | (59,406) | $ | 169,349 | $ | (228,755) | (135) | % | ||||||||||||||||||
| Interest expense | 615,563 | 570,322 | 45,241 | 8 | % | |||||||||||||||||||||
| Gain on forgiveness of PPP loan | — | (117,953) | 117,953 | 100 | % | |||||||||||||||||||||
| Total other expense | $ | 556,157 | $ | 621,718 | $ | (65,561) | (11) | % | ||||||||||||||||||
For the nine months ended September 30, 2022, we had net other expense of $556,157 related to interest expense, offset in part by 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 the decrease in our stock price and volatility, for the period ended September 30, 2022 as compared to the period ended September 30, 2021. The increase in interest expense was primarily due to an in increase in the amortization of the debt discount on our Amended Credit Agreement for the period ended September 30, 2022, as compared to the period ended September 30, 2021.
For the nine months ended September 30, 2021, we had net other expense of $621,718 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 September 30, 2021, Other expenses during the period were offset by the gain on debt forgiveness realized from the PPP Loan.
Liquidity, Going Concern and Capital Resources
Liquidity and Going Concern
We have incurred operating losses and negative cash flows from operations since our inception. We expect to continue to incur significant losses and negative cash flows from operations through 2022 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. Historically, we have funded our operations primarily through the issuance of equity securities and borrowings from Sciences.
During the latter part of 2022 and in 2023, we expect to fund our operations through the strategic acquisition of EHT and subsequent liquidation of EHT's assets. Management expects that this funding opportunity will provide us with financing at least through the second quarter of 2023 which will allow Skye to complete its Phase 1 trial and commence its Phase 2 trial. During the nine months ended September 30, 2022, we expended significant resources on the acquisition of EHT and experienced transactional delays which resulted in the further extension of the outside date to close the transaction. Due to these delays, in October 2022 we obtained a working capital loan from EHT to continue operations through the date of closing. These two factors, among others, have resulted in an overall increase in cash used in operating activities for the nine months ended September 30, 2022. On November 10, 2022, we closed the Acquisition and acquired its remaining assets consisting primarily of cash and real estate. However, based on our expected cash requirements, without obtaining additional funding by the end of the second half of 2023, we will not have enough funds to continue operations. These conditions give rise to substantial doubt as to our ability to continue as a going concern within one year after the date that the financial statements are issued.
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During the third quarter of 2022, we met our operational funding requirements during the pre-closing period by, among other things, laying off two employees and entered into a $700,000 working capital bridge loan from EHT. In late 2022 and early 2023, we will continue with the liquidation of EHT's assets and pursue financing transactions. 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.
On October 5, 2018, we secured a Credit Agreement with Sciences, that provided us with a credit facility of up to $20,000,000. On April 29, 2020, we entered into 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 to the Amended Credit Agreement to defer interest payments until the earlier 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 plus accrued interest of $305,734 was due on October 5, 2022 and we are currently within the 30 business day grace period for repayment.
As of September 30, 2022, we had an accumulated deficit of $56,846,123, stockholders’ deficit of $3,284,981 and a working capital deficit of $3,462,290. We had unrestricted cash of $415,389 as of September 30, 2022, as compared to $8,983,007 as of December 31, 2021. The decrease was attributable to operating cash burn during the nine months ended September 30, 2022, which was accelerated due to Acquisition related costs and increases in our research and development expenses as we approach our Phase 1 clinical study. Without additional funding, management believes that we will not have enough funds to meet our obligations and continue our preclinical and clinical studies beyond one year after the date the Condensed Consolidated Financial Statements are issued. These conditions indicate it is probable that there is substantial doubt as to our ability to continue as a going concern, unless we are able to raise sufficient capital to continue our operations.
Our prior independent registered public accounting firm has issued a report on our audited consolidated financial statements as of and for the year ended December 31, 2021, 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 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 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 Condensed Consolidated Financial Statements which are included elsewhere in this Form 10-Q:
| Nine Months Ended September 30, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Net cash used in operating activities | $ | (7,872,550) | $ | (4,506,032) | ||||||||||
| Net cash used in investing activities | (452,110) | (36,828) | ||||||||||||
| Net cash (used in) provided by financing activities | (242,955) | 13,163,078 | ||||||||||||
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 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 expense related to the amortization of our debt discounts on our related party Amended Credit Agreement, fair value adjustments related to our warrant liability and depreciation and amortization.
Cash used in operating activities of $7,872,550 during the nine months ended September 30, 2022, reflected a net loss of $9,589,960, partially offset by aggregate non-cash charges of $930,372 and included a $787,038 net change in our operating assets and liabilities.
Non-cash charges included $425,846 for stock-based compensation expense, $480,466 non-cash interest expense from the amortization of the debt discount on the multi-draw credit facility – related party, a $59,406 gain from the decrease in fair value of our warrant liability and $83,466 in depreciation and amortization. The net change in our operating assets and liabilities included a $334,127 increase in our accrued expense and other current liabilities and a $488,222 increase in our accounts payable.
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Cash used in operating activities of $4,506,032 during the nine months ended September 30, 2021, reflected a net loss of $6,009,362, partially offset by aggregate non-cash charges of $1,247,113 and included a $256,217 net change in our operating assets and liabilities. Non-cash charges included $747,252 for stock-based compensation expense, $439,053 non-cash interest expense from the amortization of the debt discount on the multi-draw credit facility – related party, $9,412 depreciation and amortization of property and equipment, $169,349 loss from the increase in fair value of our warrant liability and $117,953 related to the forgiveness of the PPP loan. The net change in our operating assets and liabilities included a $149,213 decrease in our prepaid expense and other current assets, a $69,751 decrease in accounts payable and a $483,490 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 incurred in connection with the acquisition of EHT. During the nine months ended September 30, 2022 and 2021, the Company purchased $15,556 and $36,828 in machinery office equipment, respectively. During the nine months ended September 30, 2022, the Company made $436,554 in payments for costs related to the Acquisition of EHT.
During the nine months ended September 30, 2021, our investing activities have consisted primarily of our capital expenditures in relation to the purchase of property plant and equipment.
Cash Flows from Financing Activities
Cash flows from financing activities primarily reflect proceeds from the sale of our securities and debt financings.
During the nine months ended September 30, 2022, cash used in financing activities included $1,967 in proceeds received in connection with the exercise of pre-funded warrants and a $244,922 repayment on the our insurance premium loan payable.
During the nine months ended September 30, 2021, cash provided by financing activities included $7,011,799 in proceeds received in connection with the exercise of warrants, $6,146,496 in net proceeds from the issuance of common stock, pre-funded warrants and common stock 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 September 30, 2022. 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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no other material developments with respect to previously reported legal proceedings discussed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 1A. Risk Factors.
Not required because we are a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The language in Item 5 below under the heading "Completion of Acquisition or Disposition of Assets" is incorporated by reference into this section.
The Consideration Shares, the Replacement Options, and the Replacement Warrants (each as defined below) issued by the Company in connection with the consummation of the Arrangement were issued in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 3(a)(10) of the Securities Act based on the final order of the Supreme Court of British Columbia following a hearing by the court which considered, among other things, the fairness of the Acquisition to the persons affected.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Completion of Acquisition or Disposition of Assets
As previously disclosed in the Current Reports on Form 8-K filed by the Company with the Securities and Exchange Commission (the “SEC”), the Company entered into an Arrangement Agreement on May 11, 2022 (as amended, the “Arrangement Agreement”), with EHT, pursuant to which the Company agreed to acquire all of the issued and outstanding common shares of EHT (the “EHT Shares”) pursuant to a plan of arrangement (the “Plan of Arrangement”) under the Business Corporations Act (British Columbia) (the “Acquisition”). The Supreme Court of British Columbia issued a final order approving the Acquisition on August 25, 2022. On November 7, 2022, EHT and the Company agreed to waive the mutual closing condition requiring the Company to obtain conditional approval from the Canadian Stock Exchange to list the common stock of the Company. The Acquisition was consummated on November 10, 2022 (the “Closing Date”).Under the terms of the Arrangement Agreement and the Plan of Arrangement, on November 10, 2022, each share of EHT common stock (“EHT Shares”) outstanding immediately prior to the effective time of the Acquisition (the “Effective Time”) was transferred to the Company in exchange for 1.95 of a share (the “Exchange Ratio”) of Company common stock, par value $0.001 per share (“Company Common Stock”). In the aggregate, EHT shareholders received 416,270,514 shares of Company Common Stock (the “Consideration Shares”). The Exchange Ratio was agreed to on May 11, 2022 and was not adjusted for any subsequent changes in market price of the Company Common Stock or EHT Shares prior to the Closing Date. 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 Company Common Stock.
In addition, at the Effective Time, (i) all EHT options to purchase EHT Shares (“EHT Options”) granted under EHT’s omnibus incentive plan that are outstanding as of the Effective Time, were exchanged into options to purchase shares of Company Common Stock, with the number of shares underlying each option (and the exercise price of such option) adjusted based on the Exchange Ratio, with the options retaining the same term to expiry, conditions to and manner of exercise and other terms and conditions as the EHT Options (the “Replacement Options”) and (ii) each of the warrants to acquire EHT Shares (the “EHT Warrants”) were be exchanged into warrants to acquire Company Common Stock after adjustments to reflect the Acquisition and to account for the Exchange Ratio, with each warrant retaining the same term to expiry, conditions to and manner of exercise and other terms and conditions of the EHT Warrants (the “Replacement Warrants”). In the aggregate, the Company issued 8,282,626 Replacement Options and 60,947,407 Replacement Warrants in connection with the Acquisition.
43
The foregoing summary description of the completion of the Acquisition does not purport to be complete and is qualified in its entirety by reference to the terms of the Arrangement Agreement, which was filed as Exhibit 2.1 to this Quarterly Report on Form 10-Q , as well as the amendments to the Arrangement Agreement filed as Exhibits 2.2, 2.3 and 2.4 to this Quarterly Report on Form 10-Q.
Unregistered Sales of Equity Securities
The Consideration Shares, the Replacement Options, and the Replacement Warrants issued by Company in connection with the consummation of the Acquisition were issued in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 3(a)(10) of the Securities Act based on the final order of the Supreme Court of British Columbia following a hearing by the court which considered, among other things, the fairness of the Acquisition to the persons affected.
Election of Director
As of the Effective Time, the Board of Company appointed Bobby Rai to serve as a director until his successor is duly elected or appointed and qualified or until his earlier retirement, disqualification resignation, removal or death.
Mr. Rai will receive annual director compensation for his service on the Board in an amount equal to $40,000, plus aggregate annual committee compensation of $1,000. Additionally, Company anticipates that Mr. Rai will be granted a one time award of stock options consistent with their non-employee director compensation policy.
In addition, Mr. Rai entered into the Company’s standard indemnification agreement.
Financial Statements
The financial statements required by Item 9.01(a) of Form 8-K and the notes related thereto are filed as Exhibit 99.1 and 99.2 to this Quarterly Report on Form 10-Q.
The pro forma financial information required by Item 9.02(b) of Form 8-K and the notes related thereto are included above in Note 3 to the Condensed Consolidated Financial Statements (Unaudited) and are incorporated by reference herein.
Entry into a Material Definitive Agreement
On November 10, 2022, EHT, C3 Souvenir Holding, Inc., a corporation governed under the Canada Business Corporations Act ("Purchaser"), Verdélite Sciences, Inc. ("Verdélite"), Verdélite Property Holdings, Inc. ("VPHI") entered into a stock purchase agreement (the "Verdélite SPA") effective November 8, 2022, pursuant to which Purchaser will acquire all of the outstanding shares of Verdélite, the holder of EHT's most significant real estate asset, for an aggregate purchase price of approximately USD$9,312,000, subject to certain adjustments. Prior to the closing of the Acquisition, VPHI was wound up into Verdélite and Verdélite is a wholly owned subsidiary of EHT. The terms of the Verdélite SPA provide for an upfront, non refundable deposit, except in the case of material breach, in the amount of approximately $548,000, which as already been received by EHT. The remainder of the purchase price will be paid as follows, (i) approximately $6,026,000 to be paid on the closing date of the Verdélite SPA, (ii) three equal installments of approximately $913,000 to be paid on each of the 18-month ("Term 1"), 30-month ("Term 2"), and 42 month ("Term 3") anniversaries of the closing date.
Annual compounded interest on the loan receivable will be payable at the end of Term 3 and will accrue at a rate equal to the Prime Rate set by the Bank of Montreal plus 1.55%, 3.55% and 5.55% per annum for Term 1, Term 2 and Term 3, respectively. The Purchaser has the option to prepay the principal term payments in full at any time during Term 1 or Term 2. If prepayment occurs, the interest rate will be retrospectively adjusted to the Prime Rate plus 1.55%, compounded annually, until the installment payments are paid in full.
The balance of the purchase price after closing will be secured against the assets and stock of the Purchaser.
The Verdélite SPA contains customary closing conditions including, but not limited to, the completion of an environmental audit by EHT.
The foregoing description of the Verdelite SPA do not purport to be complete and are qualified in their entirety by reference to the text of the Verdelite SPA which is attached as exhibit 10.3 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.
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Item 6. Exhibits.
| 2.1 | |||||
| 2.2 | |||||
| 2.3 | |||||
| 2.4 | |||||
| 3.1 | |||||
| 3.2 | |||||
| 10.1 | |||||
| 10.2* | |||||
| 10.3*+ | |||||
| 31.1* | |||||
| 31.2* | |||||
| 32.1* | |||||
| 32.2* | |||||
| 99.1 | |||||
| 99.2 | |||||
| 101 | The following materials from the Skye Biosciences, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Balance Sheets (Unaudited), (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited), (iii) Condensed Consolidated Statements of Cash Flows (Unaudited), (iv) Condensed Consolidated Statements of Stockholders’ Equity (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.
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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.
| Skye Bioscience, Inc., a Nevada corporation | ||||||||
| November 14, 2022 | By: | /s/ Punit Dhillon | ||||||
| Punit Dhillon | ||||||||
| Its: | Chief Executive Officer, Secretary, Chairman of the Board, and Director (Principal Executive Officer) | |||||||
| November 14, 2022 | By: | /s/ Kaitlyn Arsenault | ||||||
| Kaitlyn Arsenault | ||||||||
| Its: | Chief Financial Officer (Principal Financial and Accounting Officer) | |||||||
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