Skye Bioscience, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Acquisition of Emerald Health Therapeutics, Inc.

Acquisition of Emerald Health Therapeutics, Inc.

9 Months Ended

Sep. 30, 2022

Business Combination and Asset Acquisition [Abstract]

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	$	(5,945,354)		$	17,469,261

See notes to the unaudited pro forma condensed combined balance sheet.

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.


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.

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.

(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.