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. (Tables)

Acquisition of Emerald Health Therapeutics, Inc. (Tables)

9 Months Ended

Sep. 30, 2022

Business Combination and Asset Acquisition [Abstract]

Summary of Asset Acquisition Transaction

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.

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

Schedule of Pro Forma Information

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

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.

Schedule of Stockholders' Equity Note, Warrants or Rights

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

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

Schedule of Fair Value Measurement Inputs and Valuation Techniques

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

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

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

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