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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
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.
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.
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 | |
| | | |
| | | | | | | | | | | |
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.
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 | | | | | |
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Net loss and comprehensive loss | $ | (3,127,283) | | | $ | (1,824,818) | | | $ | (9,589,960) | | | $ | (6,009,362) | | | | | |
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Loss per common share: | | | | | | | | | | | |
Basic | $ | (0.01) | | | $ | — | | | $ | (0.02) | | | $ | (0.02) | | | | | |
Diluted | $ | (0.01) | | | $ | — | | | $ | (0.02) | | | $ | (0.02) | | | | | |
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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.
SKYE BIOSCIENCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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| 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 | |
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Net (decrease) increase in cash and restricted cash | (8,567,615) | | | 8,620,218 | |
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Cash and restricted cash, beginning of period | $ | 8,987,578 | | | $ | 2,473,976 | |
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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 | |
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Cash paid during the period for: | | | |
Interest | $ | 4,275 | | | $ | 44,087 | |
Income taxes | 5,141 | | | 1,600 | |
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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 | |
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See accompanying notes to the condensed consolidated financial statements.
SKYE BIOSCIENCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
(UNAUDITED)
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| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Total Stockholders’ Equity (Deficit) |
| Shares | | Amounts | | | |
Balance, January 1, 2022 | 476,108,445 | | | $ | 476,108 | | | $ | 52,644,221 | | | $ | (47,256,163) | | | $ | 5,864,166 | |
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Stock-based compensation expense | 150,000 | | | 150 | | | 150,208 | | | — | | | 150,358 | |
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Exercise of pre-funded warrants | 19,666,667 | | | 19,667 | | | (17,700) | | | — | | | 1,967 | |
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Net loss for the three months ended March 31, 2022 | — | | | — | | | — | | | (3,043,399) | | | (3,043,399) | |
| | | | | | | | | |
Balance, March 31, 2022 | 495,925,112 | | | $ | 495,925 | | | $ | 52,776,729 | | | $ | (50,299,562) | | | $ | 2,973,092 | |
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Stock-based compensation expense | — | | | — | | | 144,364 | | | — | | | 144,364 | |
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Net loss for the three months ended June 30, 2022 | — | | | — | | | — | | | (3,419,278) | | | (3,419,278) | |
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Balance, June 30, 2022 | 495,925,112 | | | $ | 495,925 | | | $ | 52,921,093 | | | $ | (53,718,840) | | | $ | (301,822) | |
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Stock-based compensation expense | — | | | — | | | 144,124 | | | — | | | 144,124 | |
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Net loss for the three months ended September 30, 2022 | — | | | — | | | — | | | (3,127,283) | | | (3,127,283) | |
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Balance, September 30, 2022 | 495,925,112 | | | $ | 495,925 | | | $ | 53,065,217 | | | $ | (56,846,123) | | | $ | (3,284,981) | |
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See accompanying notes to the condensed consolidated financial statements.
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| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Total Stockholders’ Equity |
| Shares | | Amounts | | | |
Balance, Balance, January 1, 2021 | 288,074,415 | | | $ | 288,074 | | | $ | 38,896,693 | | | $ | (38,733,981) | | | $ | 450,786 | |
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Stock-based compensation expense | 600,000 | | | 600 | | | 145,980 | | | — | | | 146,580 | |
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Exercise of common stock warrants | 67,166,667 | | | 67,167 | | | 3,962,833 | | | — | | | 4,030,000 | |
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Exercise of pre-funded warrants | 11,800,000 | | | 11,800 | | | — | | | — | | | 11,800 | |
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Net loss for the three months ended March 31, 2021 | — | | | — | | | — | | | (2,160,517) | | | (2,160,517) | |
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Balance, March 31, 2021 | 367,641,082 | | | $ | 367,641 | | | $ | 43,005,506 | | | $ | (40,894,498) | | | $ | 2,478,649 | |
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Stock-based compensation expense | — | | | — | | | 111,699 | | | — | | | 111,699 | |
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Exercise of common stock options | 106,250 | | | 107 | | | 4,676 | | | — | | | 4,783 | |
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Exercise of common stock warrants | 28,333,334 | | | 28,333 | | | 1,671,667 | | | — | | | 1,700,000 | |
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Net loss for the three months ended June 30, 2021 | — | | | — | | | — | | | (2,024,027) | | | (2,024,027) | |
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Balance, June 30, 2021 | 396,080,666 | | | $ | 396,081 | | | $ | 44,793,548 | | | $ | (42,918,525) | | | $ | 2,271,104 | |
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Stock-based compensation expense | 750,000 | | | 750 | | | 484,973 | | | — | | | 485,723 | |
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Common stock and warrants issued | 58,111,112 | | | 58,111 | | | 6,004,663 | | | — | | | 6,062,774 | |
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Exercise of pre-funded warrants | 21,166,667 | | | 21,166 | | | 1,248,833 | | | — | | | 1,269,999 | |
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Net loss for the three months ended September 30, 2021 | — | | | — | | | — | | | (1,824,818) | | | (1,824,818) | |
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Balance, September 30, 2021 | 476,108,445 | | | $ | 476,108 | | | $ | 52,532,017 | | | $ | (44,743,343) | | | $ | 8,264,782 | |
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See accompanying notes to the condensed consolidated financial statements.
SKYE BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Nature of Operations and Business Activities
Nature of Operations
Skye Bioscience, Inc. (the “Company”) 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.
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.
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.
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.
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.
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.
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.
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.
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | | $ | ( |