Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements for the years ended December 31, 2022 and 2021 together with notes thereto. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited, to those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Unless otherwise provided in this Annual Report, references to “we,” “us,” “our” and “Skye Bioscience” in this discussion and analysis refer to Skye Bioscience, Inc., a Nevada corporation formerly known as Emerald Bioscience, Inc., together with its wholly owned subsidiaries, Nemus, a California corporation, SKYE Bioscience Pty Ltd ("SKYE Bioscience Australia"), an Australian proprietary limited company formerly known as EMBI Australia Pty Ltd., Emerald Health Therapeutics, Inc. (EHT), Verdélite Sciences, Inc. (VDL) and Avalite Sciences, Inc. (AVI).
About Skye Bioscience, Inc.
We were incorporated in the State of Nevada on March 16, 2011. We are a clinical stage pharmaceutical company focused on the discovery, development and commercialization of a novel class of cannabinoid derivatives to modulate the endocannabinoid system, which has been shown to play a vital role in overall human health and, notably, in multiple ocular indications. We are developing novel cannabinoid derivatives through our own directed research efforts and multiple license agreements. We have retained Novotech as our contract research organization ("CRO") in Australia and commenced our Phase 1 trial in December 2022. We have also filed our IND for SBI-100 OE in the United States in anticipation of the start of our Phase 2 clinical trial in 2023, which we expect to commence in mid 2023.
Effective January 19, 2021, we changed our name from Emerald Bioscience, Inc. to Skye Bioscience, Inc. Our common stock is quoted on the OTCQB, under the symbol "SKYE". Previously, it traded under the symbol EMBI.
In August 2019, we formed a new subsidiary in Australia, 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 our drug product candidates. SKYE Bioscience Australia is currently conducting our Phase 1 clinical study in Australia. We expect to report final data from this study in the fourth quarter of 2023.
As described in more detail in the section below titled “Liquidity and Going Concern”, without additional funding during the second quarter of 2023, management believes that the Company will not have enough funds to meet its obligations and continue pre-clinical and clinical studies beyond the one year date the consolidated financial statements are issued. If we do not receive additional funding during of the second quarter of 2023, we likely cannot continue operations.
EHT Acquisition
On May 11, 2022, we entered into an Arrangement Agreement (as amended, the “Arrangement Agreement”) with EHT, pursuant to which we agreed to acquire all of the issued and outstanding common shares of EHT pursuant to a plan of arrangement under the Business Corporations Act (British Columbia) (the “Acquisition”). The Acquisition was consummated
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on November 10, 2022. Under the terms of the Arrangement Agreement and the Plan of Arrangement, on November 10, 2022, each share of EHT common stock (“EHT Shares”) outstanding immediately prior to the effective time of the Acquisition (the “Effective Time”) was transferred to the Company in exchange for 1.95 shares (the “Exchange Ratio”) of Company common stock. The cash and assets of EHT and its subsidiaries acquired in the Acquisition are being used to fund our Phase 1 and Phase 2 clinical trials. EHT and its subsidiaries are currently in the final stages of its realization process to wind down all prior operations and liquidate substantially all of its remaining assets.
As of the date of this Annual Report on Form 10K, we have divested both of EHT's former operating subsidiaries, VDL and Emerald Health Therapeutics Canada, Inc., and are in the process of resolving EHT's legacy tax matters with the Canadian tax authorities. In February 2023, the closing payment from the sale of VDL provided the Company with $5,547,000. This Acquisition has been a pivotal financing event for our business, allowing us to extend our cash runway into the second quarter of 2023 and will provide us with future funding as we collect the remaining receivables. In addition, EHT has a vacant lab facility which we are currently evaluating to determine whether it is practical to bring certain aspects of our research and development activities in house or to divest to generate additional corporate funding.
Our Product Candidates and Significant Contracts.
UM 5050 and UM 8930 License Agreements
We have license agreements with University of Mississippi ("UM") for UM 5050 and UM 8930 for "all fields of use" (each, a "License Agreement" and, collectively, the “License Agreements”). Pursuant to the License Agreements, UM granted us an exclusive license including, with the prior written consent of UM, the right to sublicense the intellectual property related to UM 5050 (referred to by Skye as SBI-100) and UM 8930 (referred to by Skye as SBI-200) for all fields of use. All fields of use means no restrictions on use of the underlying inventions, including developing UM 5050 and UM 8930 to treat any disease through any form of delivery under the License Agreements.
The exclusive license for our lead molecule, SBI-100, a cannabinoid receptor type 1 ("CBR1") agonist, under the License Agreement for UM 5050 is expected to allow us to explore related uses for the active moiety of SBI-100. Independent in vitro and in vivo studies have demonstrated the potential use of SBI-100 in a variety of potential indications based on the ability of CBR1 agonists to act as an anti-inflammatory, anti-fibrotic and/or inhibitor of neovascularization. The Company has generated data related to these effects using an ex vivo human tissue model of the eye. While earlier third party research validated the utility of a cannabinoid to provide therapeutic utility against diseases such as glaucoma, available methods of administration were burdened with their own side effects and limitations. Notably, it is difficult to topically deliver a natural cannabinoid molecule into the eye due to its lipophilic nature. SBI-100 is a natural cannabinoid that has been chemically modified to reduce the lipophilic nature of the original molecule and enhance the ability to administer the molecule on and through the eye. It is designed such that after it is introduced into the body, enzymes convert it back to its original active ingredient and enable its beneficial mechanisms of action to be unlocked. The Company's development team is also considering various routes of administration for SBI-100 into the body for different potential disease applications.
The exclusive license of SBI-200, a novel cannabinoid receptor ("CBR") modulator, under the License Agreement for UM 8930, allows us to explore uses in ophthalmic disorders as well as expanded research and development into organ systems outside of ophthalmology. Potential therapeutic areas beyond ophthalmic indications for SBI-200 may include the central nervous system, gastrointestinal tract, endocrine/metabolic system, reproductive system, or as yet unrecognized opportunities. We have developed strategic collaborations to identify and advance these applications.
SBI-100 OE
Our lead product, SBI-100 OE, is initially being developed to treat glaucoma and ocular hypertension. SBI-100 OE is comprised of the molecule licensed from UM, SBI-100, plus a proprietary nanoemulsion formulation. The first-in-human Phase 1 trial of SBI-100 OE is currently being conducted in healthy volunteers in Australia to evaluate this drug candidate's safety, tolerability, pharmacokinetics and pharmacodynamics. We are eligible under the AusIndustry research and development tax incentive program to obtain a cash incentive from the Australian Taxation Office. The tax incentive is available to us based on specific criteria with which we must comply and is based on our eligible research and development spend in Australia. The Company is currently eligible for a 48.5% refundable tax offset as long as it has aggregate turnover of less than $20 million per annum.
Manufacturing of SBI-100 OE has been conducted in the United States. We completed the manufacture of the clinical trial material for our Phase 1 clinical trial in September 2022. We rely on compendial excipients that can be sourced from countries outside the United States, such as China.
In June 2022, we received approval from Belberry Limited, a certified Australian Human Research Ethics Committee, to begin our Phase 1 clinical trial for the study of our lead product candidate, SBI-100 OE. We subsequently notified the Australian Therapeutics Goods Administration of our intent to initiate our Phase 1 clinical trial through the Clinical Trial Notification
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scheme. In connection with this marketing approval to initiate the first-in-human trial for SBI-100 OE, we triggered the first milestone payment under our License Agreement for UM 5050 with UM. We commenced enrollment and dosing of the Phase 1 in November and December 2022. We expect our Phase 1 study to complete enrollment in the first half of 2023. The Company has announced that the safety review committee ("SRC") for this study reviewed safety data from the first and second cohorts of the single ascending dose arm of the Phase 1 and recommended advancing to the next cohort. After the review of the second cohort of safety data, the SRC also provided its recommendation that the study progress to the second arm of the Phase 1 study.
During the third and fourth quarter of 2022, we manufactured the active pharmaceutical ingredient to be used in our Phase 2 clinical trial. The formulation and packaging of SBI-100 OE for its planned Phase 2 trial will be conducted by NextPharma Oy at its Finnish facility. NextPharma is a contract manufacturing organization with strong capabilities in preservative-free multi-dose and blow-fill-seal packaging of eye drop dispensers.
In December 2022 we obtained FDA clearance of our Investigational New Drug application to conduct clinical studies in the US, clearing the path to commence our Phase 2 trial in the United States without having to first complete our Phase 1 study. We expect to begin our Phase 2 trial in the middle of 2023. The Phase 2 study will be a randomized, controlled, double-masked clinical trial in patients with glaucoma or ocular hypertension to obtain additional data to determine whether the topical delivery of SBI-100 OE is safe and well-tolerated, and whether the IOP is markedly different between SBI-100 OE and the placebo.
In January 2023, our Phase 2 clinical trial protocol received study level approval from a central institutional review board (“IRB”). Additionally, in February 2023 we announced an agreement with Lexitas Pharma Services, Inc. (“Lexitas”), a leading full-service ophthalmic-focused contract research organization (“CRO”), to conduct our Phase 2a study for glaucoma and ocular hypertension.
SBI-200
We have initiated research activities to explore the utility of SBI-200. Early studies of SBI-200 demonstrated analgesic, anti-inflammation, anti-fibrotic and anti-seizure properties, including the potential treatment and management of several eye diseases, such as uveitis, dry eye syndrome, macular degeneration and diabetic retinopathy. Data we presented at the American Association of Pharmaceutical Scientists ("AAPS") meeting held in November 2017 revealed that an early ocular formulation of SBI-200 was able to penetrate multiple compartments of the eye, including reaching the retina and the optic nerve. We are further evaluating the possible utility and development of this compound as a therapeutic agent.
General Trends and Outlook
During the second quarter of 2022, we were indirectly impacted by a cyberattack on our Phase 1 clinical supply contract manufacturer. This disruption delayed our production timeline and the anticipated initiation of enrollment in our Phase 1 clinical studies for SBI-100 Ophthalmic Emulsion ("SBI-100 OE") to the fourth quarter of 2022. The overall potential delay in our drug product research and development from these types of incidents is unknown, but our operations and financial condition may continue to suffer in the event of continued business interruptions, supply chain issues, delayed clinical trials, production or a lack of laboratory resources due to the pandemic and other global conditions. It is possible that we may encounter other similar issues relating to the current situation that will need to be managed in the future. The factors to take into account in going concern judgements and financial projections include travel bans, restrictions, government assistance and potential sources of replacement financing, financial health of service providers and the general economy.
Financial Overview
We have incurred net losses and generated negative cash flows from operations since inception and expect to incur losses in the future as we continue development activities to support our product candidates through clinical trials. As a result, we expect to continue to incur operating losses and negative cash flows until our product candidates gain market acceptance and generate significant revenues.
Our net loss for the year ended December 31, 2022 was $19,481,602, as compared to a net loss of $8,522,182, for the year ended December 31, 2021. As of December 31, 2022, we had an accumulated deficit of $66,737,765 and negative cash flows from operations of $12,744,072. As of December 31, 2022, we had unrestricted cash of $1,244,527 as compared to $8,983,007 as of December 31, 2021.
On February 5, 2021, we increased our authorized shares of common and preferred stock to 5,000,000,000 and 50,000,000, respectively.
Critical Accounting Policies and Estimates
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the
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United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to accrued expenses, the percentage of completion as it relates to our clinical accruals, financing operations, contingencies, the fair value of assets acquired in the acquisition, and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our consolidated financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. These accounting policies are described at relevant sections in this discussion and analysis and in the notes to the consolidated financial statements included in this Annual Report on Form 10-K. We believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our consolidated financial statements.
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 our 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.
Convertible Instruments
We account for hybrid contracts with embedded conversion features in accordance with Accounting Standards Codification ("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 GAAP 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.
We account 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, we record, 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 we determine 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.
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We also follow ASC 480-10, Distinguishing Liabilities from Equity ("ASC 480-10") when evaluating the accounting for our 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 Consolidated Statements of Operations.
When determining the short-term vs. long-term classification of derivative liabilities, we first evaluate 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, we carefully evaluate all factors that could potentially restrict the instrument from being exercised or create a situation where exercise would be considered remote. We re-evaluate our derivative liabilities at each reporting period end and make updates for any changes in facts and circumstances that may impact classification.
Warrants Issued in Connection with Financings
We generally account 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 we 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, we record the fair value of the warrants as a liability at each balance sheet date and record changes in fair value in other expense (income), net in our Consolidated Statements of Operations.
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 our 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
We apply 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. The diluted loss per share of common stock is computed by giving effect to all potential common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, options to purchase common stock, restricted stock subject to vesting, warrants to purchase common stock and common shares underlying convertible debt instruments are considered to be common stock equivalents.
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Commitments and Contingencies
We follow ASC 440 & ASC 450, subtopic 450-20 to report accounting for contingencies and commitments respectively. Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to us, but which will only be resolved when one or more future events occur or fail to occur.
We assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against us or un-asserted claims that may result in such proceedings, we evaluate the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Based upon information available at this time, we believe that the current litigation matter related to the Cunning Lawsuit will have a material adverse effect on our consolidated financial position, results of operations and cash flows.
Asset Acquisition
We evaluate 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 we have 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. We also evaluate 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 our name, are recorded on a gross basis as an asset with a corresponding liability in our Consolidated Balance Sheets.
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.
Assets Held for Sale
Assets held for sale include the VDL real estate asset, Health Canada license and related intellectual property, that we plan to sell within the next year. Assets that meet the held for sale criteria are held for sale and reported at the lower of their carrying value or their fair value, less estimated costs to sell. Changes in fair value are recorded as a gain or loss in the results of operations but not to exceed original carrying value. An arrangement was in place to sell the assets of VDL at the time we completed the Acquisition of EHT, as such the VDL assets are considered held for sale and are presented within the Consolidated Balance Sheets. As of December 31, 2022 the VDL assets are held at carrying value less any costs to sell. The divestiture of VDL was completed after the balance sheet date on February 9, 2023.
Recently Issued and Adopted Accounting Pronouncements
See Note 2 to the accompanying consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K for information on recently issued accounting pronouncements and recently adopted accounting pronouncements. While we expect certain recently adopted accounting pronouncements to impact our estimates in future periods, the impact upon adoption was not significant to our current estimates and operations.
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Results of Operations
Our results of operations have fluctuated from period to period and may continue to fluctuate in the future, based upon the progress of our clinical trials, our research and development efforts, variations in the level of expenditures related to investor relations and seeking new sources of capital, debt service obligations during any given period, and the uncertainty as to the extent and magnitude of the residual global impacts from the COVID-19 pandemic such as supply chain disruptions and inflation. Results of operations for any period may be unrelated to results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results.
For the years ended December 31, 2022 and 2021
Research and DevelopmentExpenses
Research and development expenses included the following:
• license fees;
• payments to third party manufacturing organizations and consultants.
We expect to incur future research and development expenditures to support our preclinical and clinical studies. Preclinical activities include, laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies to assess safety and efficacy. Subject to the submission and approval by the FDA of our IND, clinical trials may commence and will involve the administration of the investigational new drug candidate to human subjects.
Below is a summary of our research and development expenses during the years ended December 31, 2022 and 2021:
Year Ended December 31,
Research and development expenses for the year ended December 31, 2022 increased by $3,080,368 when compared to the year ended December 31, 2021. The increase in research and development expenses was primarily due to an increase in contract research and development activities, including $2,348,534 for the manufacturing of our Phase 1 clinical trial material for SBI-100 OE, the manufacture of API for our Phase 2 study and contracted site initiation costs for our Phase 1 clinical study. In addition, we incurred an increase of $77,601 in expense for the use of specialized consultants, had increased costs related to lab supplies and materials of $36,105, an increase in compensation cost of $493,281 due to bonus expense and additional headcount from the addition of regulatory and development personnel, an increase in software of $24,956 and an increase in license fees of $86,979 from meeting the first milestone under our license agreement with UM which was offset by the cancellation of UM5070.
General and Administrative Expenses
Below is a summary of general and administrative expenses during the years ended December 31, 2022 and 2021:
Year Ended December 31,
General and administrative expenses for the year ended December 31, 2022 increased by $1,178,340 as compared to the year ended December 31, 2021. The increase in general and administrative expenses was primarily due to an increase in employee wages and board fees of $746,952 related to the hiring of our chief financial officer, the addition of two board members and the special transaction bonus for executives and board members related to the Acquisition. Additionally, there were increases in professional and legal fees of $732,529 related primarily to preliminary diligence costs associated with the Acquisition which were expensed as incurred during the first quarter and other general legal costs from litigation and the roll out of our employee stock purchase plan and the amendment to our equity incentive plan. We also had increases in software expense of $169,183 from the implementation of new systems, an increase in facilities and rent expense of $23,290 and increases in travel and
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insurance costs totaling $96,210. The aggregate increase was offset by decreases of $278,224, $202,834 and $119,205 in investor relations expenses, consulting and marketing and other general business expenses, respectively.
Estimated legal contingency
Below is a summary of the estimated legal contingency during the years ended December 31, 2022 and 2021:
Year Ended December 31,
For the year ended December 31, 2022, we recorded an estimated for a legal contingency of $6,205,310 related to the Cunning Lawsuit. The estimate reflects the full amount of the judgement plus an estimate for the plaintiff's legal fees.
Other Expense
Below is a summary of other expense during the years ended December 31, 2022 and 2021:
Year Ended December 31,
For the year ended December 31, 2022, we had net other expense of $1,163,129 primarily related to interest expense and wind down costs associated with the Acquisition. In addition, we recognized a finance charge of $120,228 from the repricing of the Sciences warrants. The increase was offset by decreases in interest expense of $104,026 due to a lower average outstanding principal balance outstanding during the year on the Amended Credit Agreement, a decrease in the fair value of the derivative liabilities of $80,894 and interest income of $19,008. Other expenses were offset by the gain on debt forgiveness realized from the PPP Loan that was realized during the period ended December 31, 2021.
Our results of operations have fluctuated from period to period and may continue to fluctuate in the future, based upon the progress of our clinical trials, our research and development efforts, variations in the level of expenditures related to investor relations and seeking new sources of capital. Results of operations for any period may be unrelated to results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results. In particular, to the extent our medical affairs personnel and clinical trial subjects are subject to varying levels of restriction on accessing clinical trial sites due to constraints on the global supply chain, we expect our progress towards executing our clinical trials to be adversely affected.
Liquidity, Going Concern and Capital Resources
Liquidity and Going Concern
We have incurred operating losses and negative cash flows from operations since our inception. We expect to continue to incur significant losses and negative cash flows from operations through 2023 and into the foreseeable future. We anticipate that we will continue to incur net losses in order to advance and develop potential drug candidates into preclinical and clinical development activities and support our corporate infrastructure, which includes the costs associated with being a public company. Historically, we have funded our operations primarily through issuance of equity securities, borrowings from a related party and strategic transactions.
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As of December 31, 2022, we had an accumulated deficit of $66,737,765, stockholders’ deficit of $3,008,054 and a working capital deficit of $3,175,408. We had unrestricted cash of $1,244,527 as of December 31, 2022, as compared to $8,983,007 as of December 31, 2021. The decrease in our cash balance was primarily attributable to increased research and development expenses related to manufacturing SBI-100 in anticipation of the start of our Phase 2 clinical trial and prepayments to our CRO for our Phase 1 clinical trial, which commenced in the fourth quarter of 2022. The Company expects to continue to incur significant losses and negative cash flows from operations through 2023 and expects to incur significant losses and negative cash flows from operations in the future. During 2022, we also expended significant legal and professional resources on the Acquisition and general litigation, including litigation associated with the Cunning Lawsuit, as described in more detail above under the caption "Legal Proceedings - Cunning Lawsuit". The various Acquisition related transactional delays resulted in the further extension of the outside date to close the Acquisition. 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. Upon closing the Acquisition, we acquired net assets with an estimated fair value of $15,045,412, upon closing the Acquisition we received $6,784,057 in cash and upon the closing of the Verdélite SPA we received a closing payment of $5,547,000 on February 10, 2023. We expect to collect the remainder of the value from the divestiture of EHT's assets over a four year period. However, there are significant risks and uncertainties around the timing of these payments and ultimate realization of these assets.
On October 5, 2018, we secured a Credit Agreement with Sciences, that provided us with a credit facility of up to $20,000,000. On April 29, 2020, we entered into the first amendment to the Credit Agreement with Sciences, which amended and restated the Credit Agreement. On March 29, 2021, we entered the second amendment to the Amended Credit Agreement to defer interest payments until the earlier of maturity or prepayment of the principal balance. Effective September 15, 2021, the disbursement line under the credit facility was closed. As of December 31, 2022, we had an outstanding principal balance of $1,848,375 under the Amended Credit Agreement. The outstanding advances plus accrued interest under the Amended Credit Agreement were due on October 5, 2022 and on November 17, 2022, we executed an extension of the maturity date to December 30, 2022 in exchange for the repricing of Sciences warrants and the repayment of 25% of the outstanding principal balance plus accrued interest. On December 30, 2022, we negotiated an additional extension of the maturity date to the earlier of February 28, 2023 or the closing Verdélite SPA. On February 16, 2023, Sciences exercised all of its outstanding warrants and converted the remaining balance of the Amended Credit Agreement plus accrued interest which extended our cash runway. Pursuant to the February 16, 2023 Master Transaction Agreement with Sciences, Sciences agreed to use its best efforts to distribute the shares of Skye held by Sciences to the individual shareholders of Sciences upon Skye's listing to a nationally recognized exchange.
As described more fully above under the caption, “Legal Proceedings – Cunning Lawsuit”, on January 18, 2023, a jury rendered a verdict in favor of Ms. Cunning and awarded her $512,500 in economic damages (e.g., lost earnings, future earnings and interest), $840,960 in non-economic damages (e.g., emotional distress) and $3,500,000 in punitive damages. The plaintiff's counsel has also filed a motion for attorney fees claiming fees of $1,351,850 and a multiplier of 1.5, for a total of $2,027,775. This jury verdict resulted in the recognition of an estimated legal contingency of $6,205,310, this judgement and the trial preparation also increased our overall legal costs for the year ended December 31, 2022. We strongly believe that this case was incorrectly decided as to liability, the amount of compensatory damages, and the appropriateness and amount of punitive damages. We intend to vigorously challenge the verdict in the trial court and appeal and pursue reimbursement under our existing insurance policies. However, the outcome of the litigation and the amount recoverable under its existing insurance policies, if any, is inherently uncertain.
We expect that the potential expected cash outflows required to pursue legal appeals or other strategies may limit our ability to pursue all of our plans for our business. Furthermore, the uncertainty as to the resolution of the litigation could limit our ability to raise new capital from investors to operate our business. Additionally, the increased turmoil in the U.S. capital markets created a substantially more difficult business environment. Our ability to access the capital markets is expected to be extremely limited.
Without additional funding during the second quarter of 2023, management believes that the Company will not have enough funds to meet its obligations and continue pre-clinical and clinical studies beyond one year after the date the consolidated financial statements are issued. If we do not receive additional funding during the second quarter of 2023, we likely cannot continue operations.These conditions indicate it is probable that there is substantial doubt as to our ability to continue as a going concern, unless we are able to raise sufficient capital to continue our operations.
Our independent registered public accounting firm has issued a report on our audited consolidated financial statements as of and for the year ended December 31, 2022 that included an explanatory paragraph referring to our recurring operating losses and expressing substantial doubt in our ability to continue as a going concern. Our consolidated financial statements have been prepared on a going concern basis, which assumes the realization of assets and settlement of liabilities in the normal course of business. Our ability to continue as a going concern is dependent upon, among other things, the successful resolution of our litigation with Ms. Cunning, our ability to generate profitable operations in the future and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they become due. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that we will be able to continue as
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a going concern. Our consolidated financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.
Cash Flows
The following is a summary of our cash flows for the periods indicated and has been derived from our consolidated financial statements which are included elsewhere in this Form 10-K:
Year Ended December 31,
Net cash, case equivalents and restricted cash provided by (used in):
Cash Flows from Operating Activities
The primary use of cash for our operating activities during these periods was to fund research development activities for our clinical product candidate, SBI-100 OE, and general and administrative activities. Our cash used in operating activities also reflected changes in our working capital, net of adjustments for non-cash charges, such as a finance charge from the repricing of the Sciences warrants in connection with the extension of the Amended Credit Agreement, stock-based compensation expense, non-cash interest expense related to the amortization of our debt discounts on our related party Amended Credit Agreement, fair value adjustments related to our warrant liability and an estimated legal contingency related to the Cunning Lawsuit.
Cash used in operating activities of $12,744,072 during the year ended December 31, 2022, reflected a net loss from operations of $19,481,602, the losses were adjusted by aggregate non-cash charges of $7,499,434 and included a $761,904 decrease in our operating assets and liabilities. Non-cash charges included $629,032 for stock-based compensation expense, $489,595 non-cash interest expense from the amortization of the debt discount on the Amended Credit Agreement, a $59,729 gain from the decrease in fair value of our warrant liability, depreciation and amortization of $114,998, a finance charge of $120,228 due to the Sciences warrant repricing, and a loss of $6,205,310 due to the estimated legal contingency associated with the Cunning Lawsuit. The net change in our operating assets and liabilities included a $109,943 increase in our prepaid expense and other current assets, an increase in accounts payable of $799,740, and a $1,671,587 decrease in our accrued expense and other current liabilities.
Cash used in operating activities of $6,474,888 during the year ended December 31, 2021, reflected a net loss of $8,522,182, partially offset by aggregate non-cash charges of $1,400,351 and included a $646,943 net change in our operating assets and liabilities. Non-cash charges included $869,206 for stock-based compensation expense, $593,802 non-cash interest expense from the amortization of the debt discount on the Amended Credit Agreement, a $21,165 loss from the increase in fair value of our warrant liability, depreciation and amortization of $34,131, and a $117,953 gain from the forgiveness of the PPP Loan. The net change in our operating assets and liabilities included a $434,110 increase in our prepaid expense and other current assets, an increase in accounts payable of $518,638, and a $580,258 increase in our accrued expense and other current liabilities.
Cash Flows from Investing Activities
Cash provided by continued investing activities of $5,214,395 during the year ended December 31, 2022 consisted of our capital expenditures in relation to the purchase of property plant and equipment of $28,060, cash divested net of proceeds received from the sale of an asset of $66,458 and cash proceeds received from the Acquisition of $5,308,913. During the year ended December 31, 2021, the Company purchased $90,866 of machinery and office equipment.
Cash Flows from Financing Activities
During the year ended December 31, 2022, cash used in financing activities included $1,967 in proceeds received in connection with pre-funded warrants and $680,901 in proceeds from the EHT bridge financing, offset by $275,537 in repayments on our insurance premium financing, and $616,125 in prepayments on the Amended Credit Agreement.
During the year ended December 31, 2021 cash provided by financing activities included $7,011,799 in proceeds received in connection with the exercise of warrants, $6,062,774 in net proceeds from the issuance of common stock and warrants and $4,783 received from employee stock option exercises in 2021.
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Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Item7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item8. Financial Statements and Supplementary Data.
Our consolidated financial statements and the report of our independent registered public accounting firm are included in this report on pages F-1 through F-38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosures. Based upon their evaluation of those controls and procedures performed as of the end of the period covered by this report, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
•pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of the company;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, with the supervision and participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2022, based on criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework - 2013 (COSO 2013 Framework).
Based on their assessment, our management concluded that, as of December 31, 2022, our internal control over financial reporting was effective.
As we are a smaller reporting company, our independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial reporting.
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Changes in internal control over financial reporting
There was no change in our internal control over financial reporting during the fourth quarter ended December 31, 2022 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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PARTIII
Item10. Directors, Executive Officers and Corporate Governance.
The following table sets forth certain information as of the date of this Annual Report, with respect to our directors, executive officers and significant employees.
Name Age Position
Punit Dhillon 42 Chief Executive Officer, Chairman, Director
Kaitlyn Arsenault 36 Chief Financial Officer
Margaret Dalesandro 76 Director
Deborah Charych 58 Director
Praveen Tyle 63 Director
Keith Ward 53 Director
Biographies of Directors, Executive Officers and Significant Employees
Punit Dhillon. Mr. Dhillon currently serves as the Chair of the Board of Directors and as the Company’s President and Chief Executive Officer. Mr. Dhillon was appointed as a member of the Board of Directors in 2018. In December 2019, Mr. Dhillon was appointed as the Chairman of the Board of Directors. In August 2020, Mr. Dhillon was appointed as the Company's Chief Executive Officer. Mr. Dhillon is currently a board member of Arch Therapeutics Inc., a US-based biotechnology company developing a novel approach to stop bleeding (hemostasis), control leaking (sealant), and manage wounds during surgery, trauma, and interventional care (OTCQB: ARTH). Mr. Dhillon was the co-founder and former President & CEO of OncoSec Medical Incorporated (NASDAQ: ONCS), a leading biopharmaceutical company developing cancer immunotherapies for the treatment of solid tumors, where he served as an executive until March 2018 and as a director until February 2020. Prior to that, from September 2003 to March 2011, Mr. Dhillon served as Vice President of Finance and Operations at Inovio Pharmaceuticals, Inc. (NASDAQ: INO), a DNA vaccine development company. Collectively, Mr. Dhillon has led and assisted in raising over $500 million through financings and mergers and acquisitions deals, as well as several licensing and development transactions with large pharmaceutical companies including Merck & Co., Inc. (NYSE: MRK), Bristol Myers Squibb Co (NYSE: BMY), and Pfizer Inc. (NYSE: PFE). Mr. Dhillon also co-founded and is the director of YELL Canada, a registered Canadian charity that partners with schools to support entrepreneurial learning. Mr. Dhillon received his Bachelor of Arts Honors degree in Political Science with a minor in Business Administration from Simon Fraser University. Mr. Dhillon's experience in the biotechnology and pharmaceutical industry and his experience with publicly traded companies give him the qualifications necessary to serve as an officer and director of the Company.
Kaitlyn Arsenault, CPA. Ms. Arsenault was appointed as the Company’s Chief Financial Officer in October 2021. From 2014 to 2021, Ms. Arsenault previously served as the President of KA Consulting, Inc., a registered public accounting firm in San Francisco, CA, providing independent technical accounting consulting services for emerging public and private companies in the pharmaceutical, life sciences, technology, and FinTech industries. From September 2016 to October 2021, she served as the Company’s Head of Financial Reporting and Technical Accounting. Ms. Arsenault's experience includes addressing complex technical accounting issues related to equity financings, derivatives, debt instruments, stock-based compensation, revenue recognition, and mergers and acquisitions, among other subjects. Prior to becoming an independent financial consultant, Ms. Arsenault spent seven years in public accounting as an assurance manager in the SEC practice of Friedman LLP (now Marcum LLP), gaining public and private audit engagement experience across multiple industries. Ms. Arsenault received her Bachelor of Science degree in Accounting from Ramapo College of New Jersey and is a Certified Public Accountant in California (active) and New Jersey (inactive). Ms. Arsenault's prior track record with the Company, extensive experience with pharmaceutical, life science, and technology companies, and vast exposure to different accounting and financial issues in the public markets give her the qualifications and skills necessary to serve as an officer of the Company.
Dr. Margaret Dalesandro. Dr. Margaret Dalesandro is currently a member of the Board and has served as a member since August 2020. From 2019 to 2021, Dr. Dalesandro served on the board of OncoSec Medical Incorporated (NASDAQ: ONCS), a late-stage biotechnology company focused on designing, developing, and commercializing innovative therapies and proprietary medical approaches to stimulate and guide an anti-tumor immune response for the treatment of cancer. In addition, she served as Chair of the OncoSec Medical Incorporated Board from early 2020 through 2021. Since 2021, Dr Dalesandro has served on the board of Seelos Therapeutics, a company focusing on the development of treatments for central nervous system diseases (NASDAQ: SEEL). Since 2012, Dr. Dalesandro has been the President of Brecon Pharma Consulting LLC., a full-service pharma/biotech consultancy focusing on identifying and obtaining critical information early in product development. Dr. Dalesandro has over thirty-five years of experience leading strategic product development in the pharmaceutical, biotechnology, and diagnostics industries. From 2009 to 2012, she served as the Business Director of Integrative Pharmacology in the Life Sciences (Corning Integrated Pharmacology - CIP) division at Corning Incorporated, leading all aspects of the CIP business including commercial, technical, P&L, competitive assessment, strategy, and talent management; from 2002 to 2009, as Vice President of Project, Portfolio and Alliance Management at ImClone Systems Incorporated, which was a biopharmaceutical company dedicated to developing biologic medicines in the area of oncology; from 2000 to 2002, as Executive Director of Project and Portfolio Management at GlaxoSmithKline, a global pharmaceutical company producing treatments for respiratory illnesses, HIV, immuno-inflammation, and oncology (among others) (NYSE: GSK); and from 1998 to 2000, as Senior Consultant at Cambridge Pharma Consultancy, Europe's largest pharmaceutical R&D strategy consulting firm. During her tenure from 1989 to 1998 at Centocor Incorporated, a biotechnology company forming a part of the Johnson & Johnson group of companies and specializing in the production of treatments for infectious, cardiovascular, and autoimmune
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diseases and cancer, Dr. Dalesandro developed and presently holds the patents on a diagnostic test for acute coronary syndrome based on the detection of platelet surface integrins. Dr. Dalesandro received her Ph.D. in Biochemistry from Bryn Mawr College and completed an NIH Post-Doctoral Fellowship in Molecular Immunology at Wake Forest University School of Medicine. Dr. Dalesandro’s significant experience with life science and technology companies give her the qualifications and skills necessary to serve as a director of the Company.
Dr. Deborah Charych. Dr. Deborah Charych is currently a member of the Board and has served as a member since February 2023. Since October 2018, Dr. Charych has served as the Co-Founder, Chief Technology Officer, and Advisor of RayzeBio, Inc, an oncology company focused on the targeted delivery of radionuclides. Dr. Charych conceived and led the scientific and operational R&D strategy for RayzeBio, leading a successful Series A financing and launch in August 2020, as well as subsequent Series B, C, and D rounds. Prior to launching RayzeBio, Dr. Charych held a number of scientific leadership positions in biotech focused on translational drug development. From 2017 to 2019, she founded Third Rock Ventures, creating new biotech companies based on strong science, co-founding Maze Therapeutics, which focuses on harnessing the power of human genetics, functional genomics, and data science to advance our understanding of how to more effectively treat patients with severe rare and common diseases. From 2010 to 2018, Dr. Charych served as Executive Director of Preclinical and Translational Research at Nektar Therapeutics, conceiving of and leading the pre-clinical and early clinical development of an immuno-oncology pipeline with NKTR-214 and NKTR-358, next-generation IL-2 receptor agonists, which are currently in Phase 3 oncology and Phase 2 autoimmune clinical trials. At FivePrime Therapeutics from 2007 to 2010, Dr. Charych was the Director of Biologics Process Development/CMC/Protein Chemistry, leading a team that contributed to the clinical development of novel biologics for pan-FGF and CSF1 antagonist antibodies for oncology and immunology diseases. From 1998 to 2006, while at Chiron Corporation, she initiated and led a large proteomics effort to guide oncology target discovery, including the discovery of peptide-mimetic binders ('peptoids'). During her time at Lawrence Berkeley National Laboratory from 1993 to 1998, she assumed an academic leadership role as a tenured Principal Investigator, focusing on new biomaterials. Dr. Charych earned a PhD in Physical Chemistry from the University of California in Berkeley, CA and a B.S. in Chemistry from Carnegie-Mellon University in Pittsburgh, PA. Dr. Charych’s education and significant experience with a wide variety of life science companies give her the qualifications and skills necessary to serve as a director of the Company.
Dr. Praveen Tyle. Dr. Praveen Tyle is currently a member of the Board and has served as a member since July 2021. Since 2006, Dr. Tyle has served as a member of the board at Kiora Pharmaceuticals, a pharmaceutical company that develops therapies for the treatment of eye diseases (NASDAQ: KPRX) and since 2003, he has served as a member of the board at Orient Europharma Co., Ltd., a pharmaceutical company operating primarily in Asia and producing a wide range of prescription drugs and nutrition products. Since 2021, Dr. Tyle has served as President, Chief Executive Officer, and Director of Invectys, Inc., a clinical-stage biopharmaceutical company founded from the world-renowned Pasteur Institute and focused on the development of innovative immunotherapy approaches to treat cancers. From 2016 to 2021, he was Executive Vice President of Research and Development at Lexicon Pharmaceuticals, Inc., a pharmaceutical company whose genetic approach to drug development is based on Nobel Prize-winning technology (NASDAQ: LXRX). From 2013 to 2016, he served as President, Chief Executive Officer, and Director of Osmotica Holdings (Cyprus & Osmotica Pharmaceutical), a company focusing on central nervous system drug development. From 2011 to 2012, Dr. Tyle was the Executive Vice President and Chief Scientific Officer of United States Pharmacopeia, an independent scientific nonprofit organization focused on building trust in the supply of safe, quality medicines. From 2008 to 2010, Dr. Tyle served as Senior Vice President and Global Head of Business Development and Licensing and Global Head of Research and Development at Novartis OTC, a pharmaceutical company that produces both patented and generic product on a global scale (NYSE: NVS). Earlier in his career, from 2004 to 2008, he was Corporate Senior Vice President and Chief Scientific Officer at Bausch + Lomb Corporation, a company specializing in eye care and whose products and innovations range from pharmaceuticals, lenses, and diagnostic and surgical tools (NYSE: BLCO / TSX: BLCO). Since 2005, Dr. Tyle has served as an Adjunct Associate Professor of Ophthalmology at the University of Rochester Eye Institute Medical Center, among other current and past academic roles. He has coauthored over 100 peer-reviewed academic papers and presentations and is named on multiple patents, including those related to ophthalmic innovations, drug delivery, and glaucoma. Dr. Tyle earned his B.Pharm. from Banaras Hindu University in India and received his PhD in Pharmaceutics & Pharmaceutical Chemistry from Ohio State University. Dr. Tyle's significant contributions in the field of ophthalmology and extensive experience with life science companies give him the qualifications and skills necessary to serve as a director of the Company.
Dr. Keith Ward. Dr. Keith Ward is currently a member of the Board and has served as a member since December 2021. Dr. Ward is a life sciences executive with over twenty-five years of experience in the biotech and pharmaceutical industry. In 2022, Dr. Ward co-founded Kuria Therapeutics, a private pharmaceutical company developing novel ophthalmic and dermal therapeutics, where he currently serves as President and Chief Executive Officer. Since 2019, Dr. Ward has also served as President and Chief Executive Officer of InterveXion Therapeutics, a private clinical-stage biotech company developing immunotherapies for substance use disorders. Prior to joining InterveXion, Dr. Ward served as Executive Vice President and Chief Development Officer for Reata Pharmaceuticals, where he led research and development, clinical operations, regulatory affairs, manufacturing, and project management. Before that, Dr. Ward developed ophthalmic pharmaceuticals and medical devices as Global Vice President of Pharmaceutical R&D for Bausch + Lomb. Dr. Ward has also held positions of increasing responsibility within GlaxoSmithKline and SmithKline Beecham Pharmaceuticals. Dr. Ward earned a B.S. in Toxicology with a minor in Chemistry from Northeast Louisiana University and a Ph.D. in Toxicology from the University of North Carolina at Chapel Hill. Dr. Ward’s significant experience in biotech and pharmaceutical companies give him the qualifications and skills necessary to serve as a director of the Company.
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Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers, and any persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC. SEC regulation requires executive officers, directors and greater than 10% stockholders to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during the year ended December 31, 2022, our executive officers, directors, and greater than 10% stockholders complied with all applicable filing requirements on a timely basis.
Family Relationships
There are no family relationships among our directors or executive officers.
Term of Office of Directors
Our directors serve until the next annual meeting of stockholders or until their successor has been duly elected and qualified, or until their earlier death, resignation or removal.
Directors and Officers Involvement in Certain Legal Proceedings
During the past ten years, our current directors and executive officers have not been involved in any of the legal proceedings set forth in Item 401(f) of Regulation S-K promulgated by the SEC.
Board and Committee Meetings
During 2022, our Board met six times (including telephonic meetings) and took action by written consent fifteen times. Each director attended at least 75% of the meetings held by the Board and by each committee on which she or he served while she or he was a director, either in person or by teleconference, during the year. During 2022, our Board met by special committee eleven times (including telephonic meetings) and took action by written consent two times as a result of the special committee meetings.
Director Attendance at Annual Meetings
Although we do not have a formal policy regarding attendance by members of our Board at each annual meeting of stockholders, we encourage all of our directors to attend. All our directors - other than Dr. Charych, who was elected as director in 2023 - attended our most recent meeting of stockholders.
Audit Committee and Financial Expert
On February 23, 2015, our Board established an audit committee that operates under a written charter that has been approved by our Board. The members of our audit committee are Dr. Keith Ward, Dr. Margaret Dalesandro and Dr. Praveen Tyle. Dr. Ward serves as chairman of the audit committee and our Board has determined that he is an “audit committee financial expert” as defined by applicable SEC rules. The Board has determined that Dr. Ward, Dr. Dalesandro and Dr. Tyle are independent directors as that term is defined in Rule 5605(a)(2) of the Nasdaq Listing Rules, and we have determined that each of Dr. Ward, Dr. Dalesandro and Dr. Tyle, as audit committee members, meet the more stringent requirements under Rule 5605(c)(2) of the Nasdaq Listing Rules. Our audit committee met five times (including telephonic meetings) and acted by written consent two times in 2022.
Our audit committee is responsible for: (1) selection and oversight of our independent accountant; (2) establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal controls and auditing matters; (3) establishing procedures for the confidential, anonymous submission by our employees of concerns regarding accounting and auditing matters; (4) engaging outside advisors; and, (5) approving fees for the independent auditor and any outside advisors engaged by the audit committee. The Audit Committee Charter is filed as Exhibit 99.1 to our Report on Form 8-K filed on February 27, 2015.
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Compensation Committee
On May 31, 2015, our Board established a compensation and compliance committee which operated under a written charter that was approved by the Board. In 2018, the Board dissolved the former compensation and compliance committee and established a new compensation committee which operates under a written charter approved by the Board. The members of our compensation committee are Dr. Praveen Tyle, and Dr. Margaret Dalesandro. Dr. Praveen Tyle serves as chairman of the compensation committee. The Board has determined that Dr. Margaret Dalesandro and Dr. Praveen Tyle are independent directors as that term is defined in Rule 5605(a)(2) of the Nasdaq Listing Rules. Our compensation committee met three times (including telephonic meetings) during 2022 and took no action by written consent during 2022.
Our compensation committee is responsible for the oversight of, and the annual and ongoing review of, the Chief Executive Officer, the compensation of the senior management team, and the bonus programs in place for employees, which includes: (1) reviewing the performance of the Chief Executive Officer and such other senior officers as the Board may request, and determining the bonus entitlement for such officer or officers on an annual basis and recommending the same to the Board for approval; (2) determining the proposed annual compensation of our executive officers for each fiscal year and recommending the same to the Board for approval; (3) reviewing and discussing the bonus plan proposed for our senior management team with the Chief Executive Officer; (4) reviewing and discussing the terms and conditions of proposed grants of stock options to directors, employees, consultants and advisors with the Chief Executive Officer; (5) reviewing and recommending to the Board the compensation of the Board and committee members; (6) reviewing and discussing with the Chief Executive Officer the standard forms of employment and consulting contracts used by us; (7) reviewing and discussing with the Chief Executive Officer the general benefit plans in place for employees; (8) engaging and setting the compensation for independent counsel and other advisors and consultants; and (9) reviewing and assessing the adequacy of its Charter and submitting any recommended changes to our Board for its consideration and approval.
Nomination and Corporate Governance Committee
In 2018, our Board established a nomination and corporate governance committee that operates under a written charter approved by the Board. The members of our nomination and corporate governance committee are Dr. Margaret Dalesandro, Dr. Praveen Tyle and Dr. Keith Ward. Dr. Margaret Dalesandro serves as chairman of the nomination and corporate governance committee. The Board has determined that Dr. Margaret Dalesandro, Dr. Praveen Tyle, and Dr. Keith Ward are independent directors as that term is defined in Rule 5605(a)(2) of the Nasdaq Listing Rules. Our nomination and corporate governance committee met three times during 2022 (including telephonic meetings) and took action by written consent one time.
Our nominating and corporate governance committee is responsible for assisting the Board in (1) identifying qualified individuals to become Board members, consistent with criteria approved by the Board, (2) determining the composition of the Board and its committees, (3) selecting the director nominees for the next annual meeting of shareholders, (4) monitoring a process to assess Board, committee and management effectiveness, (5) aiding and monitoring management succession planning and (6) developing, recommending to the Board, implementing and monitoring policies and processes related to our corporate governance guidelines.
Nominations to the Board of Directors
We do not have any defined policy or procedural requirements for shareholders to submit recommendations or nominations for directors. Our Board believes that, given the stage of our development, a specific nominating policy would be premature and of little assistance until our business operations develop to a more advanced level. We do not currently have any specific or minimum criteria for the election of nominees to the Board. The Board, with the help of its nomination and corporate governance committee, will assess all candidates and make recommendations for election or appointment.
Stockholder Communications
We do not have a formal policy regarding stockholder communications with our Board. A shareholder who wishes to communicate with our Board may do so by directing a written request addressed to our Chief Executive Officer, at the address appearing on the first page of this filing.
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Code of Ethics and Insider Trading Policy
On October 31, 2014, we adopted a formal code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, as well as our other officers, directors and employees. A copy of our code of ethics is available on our website at http://www.skyebioscience.com. We intend to disclose any future amendments to provisions of our code of ethics, or waivers of provisions required to be disclosed under the rules of the SEC, on a current report on Form 8-K or at the same location on our website identified in the preceding sentence. Any amendment or waiver disclosed on our website will remain available on our website for at least 12 months after the initial disclosure.
We maintain an Insider Trading Compliance Policy that prohibits our officers, directors and employees from purchasing or selling any type of security while in possession of material, non-public information relating to the security, whether the issuer of such security is the Company or any other company. Additionally, no officer, director or employee shall purchase or sell any security of the Company during the period beginning on the 14th calendar day before the end of any fiscal quarter of the Company and ending upon completion of the second full trading day after the public release of earnings data for such fiscal quarter or during any other trading suspension period declared by the Company. It prohibits officers, directors, or employees from pledging our stock as collateral to secure loans and from engaging in hedging transactions, including zero-cost collars and forward sale contracts. It further prohibits margin purchases of our stock, short sales of our stock, and any transactions in puts, calls or other derivative securities involving our stock.
Item11. Executive Compensation.
Summary Compensation Table
The following table sets forth information concerning the compensation earned for services rendered to us for the fiscal years ended December 31, 2022 and 2021 of our named executive officers as determined in accordance with SEC rules.
SUMMARY COMPENSATION TABLE
___________
(1)Amounts reflect the full grant date fair value of stock options and awards, computed in accordance with ASC Topic 718 - Stock based compensation, rather than the amounts paid to or realized by the named individual.
(2)For the year ended December 31, 2021, other compensation consists of consulting fees charged to the Company by KA Consulting, Inc. and RoseRyan, Inc. for Ms. Arsenault's services.
(3)For the years ended December 31, 2022 and 2021, other compensation consists of personal tax preparation fee reimbursements per the executives employment agreement.
(4)In connection with the Acquisition, the Board approved transaction bonuses to be paid to the CEO and CFO of $111,000 and $148,000, respectively, upon the closing of the Acquisition (see Note 5). As the Acquisition was completed on November 10, 2022, the amounts stated included the transaction bonuses.
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Employment and Severance Arrangements
Employment Agreements and Equity Awards
On August 7, 2020, we entered into an employment agreement with Mr. Punit Dhillon, our Chief Executive Officer. The agreement provides for an annual base salary of $400,000 per year and an annual discretionary bonus up to fifty percent (50%) of his base salary based on Mr. Dhillon’s achievement of annual corporate milestones agreed to by the Board. Effective June 1, 2022, Mr. Dhillon's annual base salary was increased to $450,000 per year and his annual discretionary bonus eligibility was increased to sixty percent (60%) of his base salary. Mr. Dhillon will also receive the normal benefits available to other similarly situated executives and will be entitled to severance pay under the circumstances described below.
Mr. Dhillon’s employment with the Company is at-will. Except for termination of Mr. Dhillon’s employment for “Cause,” “By Death”, “By Disability” (as such terms are defined in his employment agreement), Mr. Dhillon will be entitled to a severance payment equal to twenty-four (24) months of his then current base salary, less applicable statutory deductions and withholdings if terminated by the Company.
In connection with his appointment, the Company granted Mr. Dhillon options to purchase 9,000,000 shares of the Company’s common stock at an exercise price of $0.045 per share (the then market price of the Company’s shares), with 10% of such options vested immediately upon grant and the remaining 90% vesting equally on each six-month anniversary of the grant date over the following four and a half years from the grant date.
During the year ended December 31, 2021, Mr. Dhillon was granted 2,000,000 restricted stock units and 3,090,000 stock options. The restricted stock units vest in three equal annual installments commencing on the first anniversary of the grant date, which was December 14, 2021. The stock options vest 25% on the one year anniversary of the grant date and 1/48th monthly thereafter.
On October 4, 2021, we entered into an employment agreement with Ms. Kaitlyn Arsenault, our Chief Financial Officer. The agreement provides for an annual base salary of $300,000 per year and an annual discretionary bonus of up to thirty five percent (35%) of her base salary based in part on Ms. Arsenault’s achievement of milestones agreed to by the Board. Effective June 1, 2022, Ms. Arsenault's annual base salary was increased to $340,000 per year and her annual discretionary bonus eligibility was increased to forty percent (40%) of her base salary. Ms. Arsenault will also receive the normal benefits available to other similarly situated executives and will be entitled to severance pay under the circumstances described below.
Ms. Arsenault’s employment with the Company is at-will. Except for termination of Mr. Arsenault’s employment for “Cause,” “By Death” or “By Disability” (as such terms are defined in her employment agreement), Ms. Arsenault will be entitled to a severance payment equal to six (6) months of her then current base salary, less applicable statutory deductions and withholdings, if she is terminated by the Company.
In connection with her appointment, the Company granted Ms. Arsenault options to purchase 1,600,000 shares of the Company’s common stock at an exercise price of $0.09 per share (the then market price of the Company’s shares), with 10% of such options vested immediately upon grant and the remaining 90% vesting equally in semi-annual installments over four years from issuance.
During the year ended December 31, 2021, Ms. Arsenault was granted 1,000,000 restricted stock units and 1,770,000 stock options. The restricted stock units vest in three equal annual installments commencing on the first anniversary of the grant date, which was December 14, 2021. The stock options vest 25% on the one year anniversary of the grant date and 1/48th monthly thereafter.
On September 15, 2021, prior to Ms. Arsenault's appointment as CFO, Ms. Arsenault was granted 400,000 stock options in connection with her consulting arrangement with us. The stock options vest 10% on the grant date and 90% in equal annual installments thereafter over a period of four years.
The foregoing description of the employment agreements above does not purport to be complete and is qualified in its entirety by reference to the full text of the employment agreements attached hereto as an exhibit and incorporated by reference herein.
Severance Arrangements
In February 2015, we adopted a change in control severance plan, in which our named executive officers participate, that provides for the payment of severance benefits if the executive’s service is terminated within twelve months following a change in control, either due to a termination without cause or upon resignation for a good reason (as each term is defined in the plan).
In either such event, and provided the executive timely executes and does not revoke a general release of claims against us, he or she will be entitled to receive: (i) a lump sum cash payment equal to at least six months’ of the executive’s monthly compensation, plus an additional month for each full year of service over six years, (ii) Company-paid premiums for continued health insurance for a period equal to the length of the cash severance period or, if earlier, when executive becomes covered
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under a subsequent employer’s healthcare plan, and (iii) full vesting of all then-outstanding unvested stock options and restricted stock awards.
The foregoing descriptions of the change of control severance plan does not purport to be complete and is qualified in its entirety by reference to the full text of such change of control severance plan attached hereto as an exhibit and incorporated by reference herein.
Outstanding Equity Awards at Fiscal Year-end
As of December 31, 2022, our named executive officers held the following outstanding Company equity awards.
Option Awards Stock Awards
(1)The market value of shares that have not vested is calculated based on the per share closing price of our common stock on December 31, 2022.
(2)The options specified above vest as follows: 1/12th each month on the anniversary of the grant date.
(3)The options specified above vest as follows: 10% vests on the grant date and 90% vests in equal semi-annually installments thereafter over four years.
(4)The options specified above vest as follows: 25% vests on the one year anniversary of the grant date and 1/48th vests monthly thereafter over three years following the one year anniversary of the grant date.
(5)The restricted stock units specified above vest as follows: 33% on each grant date anniversary over three years.
(6)The options specified above vest as follows: 10% vests on the grant date and 90% vests in equal annual installments thereafter over four years.
(7)The options specified above vest as follows: 10% vests on the grant date and 90% vests in equal semi-annually installments thereafter over four years.
Exercises of Options
There were no exercises of stock options by our named executive officers during the year ended December 31, 2022.
Director Compensation
As of December 31, 2022, our policy for the compensation of our non-employee directors is as follows:
Each non-employee director receives a cash retainer of $40,000 on an annual basis, and an executive chair of the Board, if one is appointed as such and is a non-employee director, receives an additional $40,000 retainer annually.
Upon election to the Board, non-employee directors receive a one-time award of 250,000 stock options which vest in twelve equal monthly installments. In subsequent annual periods, each non-employee director receives a grant of 250,000 common stock options which vest in twelve equal monthly installments.
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Non-employee directors who serve as members of special committees of the Board receive additional compensation as follows:
•Audit Committee: $5,000 per year ($20,000 for the chair)
•Compensation Committee: $2,500 per year ($10,000 for the chair)
•Nominating and Corporate Governance Committee: $1,000 per year ($5,000 for the chair)
The table below summarizes the compensation paid by us to our non-employee directors for the year ended December 31, 2022. Mr. Dhillon, our employee director, does not receive additional compensation for his services as a member of our Board:
DIRECTOR COMPENSATION
(1)As of December 31, 2022, each non-employee director is entitled to an annual grant of 250,000 common stock options, all of which vest in twelve equal monthly installments. The amounts reported under “Option Awards” in the above table reflect the grant date fair value of these awards as determined in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification Topic 718, Compensation - Stock Compensation. The value of stock option awards was estimated using the Black-Scholes option pricing model. The valuation assumptions used in the valuation of options granted may be found in Note 7 to our financial statements included in this annual report on Form 10-K for the year ended December 31, 2022. The annual Board member grants for the year ended December 31, 2022, were approved in 2023.
(2)On May 18, 2022, Mr. Heppell resigned from our Board and concurrently entered into a consulting agreement with us pursuant to which Mr. Heppell would provide mutually agreed upon services related to the wind down of EHT. In connection with the consulting agreement, Mr. Heppell was granted options to purchase 4,000,000 shares of common stock. These options have an exercise price of $0.04, and were subject to certain performance vesting and other vesting conditions pursuant to the consulting agreement. The vesting conditions of the stock option award provided that 50% of the options were vested upon grant and the remaining 50% (the "Second Tranche") would vest upon the sale of a real estate asset held by EHT at an amount greater than or equal to an amount specified in the Arrangement Agreement (the " Vesting Condition"). On February 9, 2023, the closing date of the sale of the real estate asset held by EHT, the Second Tranche of stock options was cancelled as the Vesting Condition was not satisfied. The value of the stock option award was estimated using the Black-Scholes option pricing model. In addition, on September 14, 2021, Mr. Heppell was granted options to purchase 150,000 shares of common stock. These options have an exercise price of $0.12, vest monthly over one year and have a term of 10 years from the grant date. The value of the stock option award was estimated using the Black-Scholes option pricing model and totaled $18,300. In addition, on August 7, 2020, Mr. Heppell was granted options to purchase 1,000,000 shares of common stock. These options have an exercise price of $0.05, vest 10% on the date of grant with the remaining 90% vesting semi-annually over two years and have a term of 10 years from the grant date. The value of the stock option award was estimated using the Black-Scholes option pricing model and totaled $40,000. In addition, on October 10, 2018, Mr. Heppell was granted options to purchase 200,000 shares of common stock. These options have an exercise price of $0.31, are fully vested and have a term of 10 years from the grant date. The value of the stock option award was estimated using the Black-Scholes option pricing model and totaled $45,000. The aggregate number of shares issuable upon exercise of option awards outstanding at December 31, 2022 for Mr. Heppell was 5,350,000, of which 3,350,000 were fully vested.
(3)On September 14, 2021, Dr. Dalesandro was granted options to purchase 150,000 shares of common stock. These options have an exercise price of $0.12, vest monthly over one year and have a term of 10 years from the grant date. The value of the stock option award was estimated using the Black-Scholes option pricing model and totaled $18,300. In addition, on August 7, 2020, Dr. Dalesandro was granted options to purchase 250,000 shares of common stock. These options have an exercise price of $0.05 and vest 10% on the date of grant with the remaining 90% vesting semi-annually over two years and have a term of 10 years from the grant date. The value of the stock option award was estimated using the Black-Scholes option pricing model and totaled $10,000. The aggregate number of shares issuable
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upon exercise of option awards outstanding at December 31, 2022 for Dr. Dalesandro was 400,000, of which 400,000 were fully vested.
(4)On September 14, 2021, Dr. Tyle was granted options to purchase 25,000 shares of common stock. These options have an exercise price of $0.12, vest monthly over one year and have a term of 10 years from the grant date. The value of the stock option award was estimated using the Black-Scholes option pricing model and totaled $3,050. In addition, on July 22, 2021, Dr. Tyle was granted options to purchase 250,000 shares of common stock. These options have an exercise price of $0.14 and vest 10% on the date of grant with the remaining 90% vesting semi-annually over two years and have a term of 10 years from the grant date. The value of the stock option award was estimated using the Black-Scholes option pricing model and totaled $34,750. The aggregate number of shares issuable upon exercise of option awards outstanding at December 31, 2022 for Dr. Tyle was 275,000, of which 162,500 were fully vested.
(5)On December 14, 2021, Dr. Ward was granted options to purchase 250,000 shares of common stock. These options have an exercise price of $0.06, vest monthly over one year and have a term of 10 years from the grant date. The value of the stock option award was estimated using the Black-Scholes option pricing model and totaled $12,750. The aggregate number of shares issuable upon exercise of option awards outstanding at December 31, 2022 for Dr. Ward was 250,000, of which 250,000 were fully vested.
(6)Under the consulting agreement, Mr. Heppell is entitled to a monthly fee of $6,300, which was increased to $16,600 per month upon the closing of the Acquisition. The consulting agreement provides Mr. Heppell with a termination payment in an amount equal to the monthly fees through the then-remaining term of the agreement if Mr. Heppell’s engagement is terminated by the Company without cause. The consulting contract has been accounted for as an in-substance severance arrangement and $139,615 is recognized in severance expense during the year ended December 31, 2022. The monthly fee for Mr. Heppell's consulting agreement was adjusted to include the increased fee payments when the Acquisition closed. As of December 31, 2022, $47,512 has been paid to Mr. Heppell and $16,600 is owed and recognized in accounts payable - related party. The remaining portion of the consulting contract of $75,503 is accrued for in other current liabilities - related party. The consulting agreement with Mr. Heppell was terminated on February 9, 2023.
Item12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities Authorized for Issuance under Equity Compensation Plans
The table below includes the following information as of December 31, 2022 for the Company’s 2014 Amended and Restated Omnibus Incentive Plan (the “2014 Amended and Restated Plan”). Shares available for issuance under the 2014 Amended and Restated Plan can be granted pursuant to stock options, stock appreciation rights, restricted stock, restricted stock unit awards, performance awards and other stock-based or cash-based awards, as selected by the plan administrator. For additional information about the 2014 Amended and Restated Plan, refer to Note 8 in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Equity Compensation Plan Information
Equity compensation plans approved by security holders
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Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to beneficial ownership of our common stock as of March 29, 2023, by:
•each person known to be the beneficial owner of 5% or more of our outstanding common stock;
•each executive officer;
•each director; and
•all of the executive officers and directors as a group.
Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Under this rule, certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire shares (for example, upon exercise of an option or warrant or vesting of an RSU) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares is deemed to include the amount of shares beneficially owned by such person by reason of such acquisition rights. As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person’s actual voting power at any particular date.
The information set forth in the table below is based on 971,549,608 shares of our common stock issued and outstanding on March 29, 2023.
To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Unless otherwise indicated, the address of each beneficial owner listed below is 11250 El Camino Real, Suite 100, San Diego, CA 92130.
Name and Address of Beneficial Owner BeneficialOwnership Percentof Class
Dr. Margaret Dalesandro 560,417 (5) *%
Dr. Deborah Charych 62,500 (8) *%
All executive officers and directors as a group (6 persons) 16,939,701 (9) 1.7 %
_________
*Denotes less than 1% of our outstanding shares of common stock.
(1)The address of Sciences is 10th Floor, 595 Howe St., Vancouver, British Columbia, Canada V6B 1A1.
(2)Based on a Schedule 13DA filed with the Company on March 17, 2023.
(3)Includes (i) 2,335,721 shares of common stock held by a family trust of which Mr. Dhillon is the trustee, (ii) 3,073,209 shares of common stock held directly by Mr. Dhillon, (iii) 331,500 shares of common stock issuable upon exercise of warrants, (iv) 8,173,906 shares of common stock underlying options that may be exercised within 60 days of March 29, 2023.
(4)Includes 1,410,781 shares of common stock underlying options that may be exercised or RSUs that vest within 60 days of March 29, 2023.
(5)Includes 560,417 shares of common stock underlying options that may be exercised within 60 days of March 29, 2023.
(6)Includes 304,167 shares of common stock underlying options that may be exercised within 60 days of March 29, 2023.
(7)Includes 354,167 shares of common stock underlying options that may be exercised within 60 days of March 29, 2023.
(8)Includes 62,500 shares of common stock underlying options that may be exercised within 60 days of March 29, 2023.
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(9)Consists of (i) 5,408,930 shares beneficially owned by our current executive officers and directors as of March 22, 2023 and (ii) 10,865,938 shares subject to options exercisable or RSUs that vest within 60 days of March 22, 2023, of which 10,865,938 are vested as of such date.
Changes in Control
Our management is not aware of any arrangements which may result in “changes in control” as that term is defined by the provisions of Item 403(c) of Regulation S-K.
Item13. Certain Relationships and Related Transactions, and Director Independence.
Transactions with Related Persons
Except as specified below, there have been no other transactions with related persons in the last two fiscal years, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeds the lesser of $120,000 or 1% of the average of our total assets as of December 31, 2022 and 2021, and in which any related person had or will have a direct or indirect material interest.
Emerald Health Sciences
In January 2018, we entered into a securities purchase agreement with Emerald Health Sciences, Inc. ("Sciences") pursuant to which Sciences purchased a majority of the equity interest us, resulting in a change in control transaction. Sciences holds a significant interest in our equity as of December 31, 2022 and has provided us with financing under the Amended Credit Agreement. Jim Heppell was the Chief Executive Officer and a member of the Board of Directors of EHS during the year ended December 31, 2022 and was also a member of the Board of Directors of the Company until May 2022.
On October 5, 2018, we entered into the Credit Agreement with Sciences. The Credit Agreement originally provided for an unsecured credit facility of up to $20,000,000. Advances under the Credit Agreement accumulated interest at an annual rate of 7% and the original maturity date of the facility was October 5, 2022.
From November 1, 2018 to March 2019, Sciences advanced us an aggregate of $6,000,000 under the Credit Agreement. In connection with the advances under the Credit Agreement, we issued Sciences 7,500,000 warrants with an original exercise price of $0.50 per share and a term of five years. The warrants were fully vested at issuance.
On December 20, 2019, we entered into a Warrant Exchange Agreement, pursuant to which Sciences exercised 40.8 million warrants and paid the aggregate exercise price of approximately $4.08 million for the related warrant shares in the form of a reduction of the corresponding amount of obligations outstanding under the Credit Agreement. Upon consummation of the transaction under the Warrant Exchange Agreement, the total remaining principal amount excluding discounts under the Credit Agreement was $2,014,500.
On April 29, 2020, we entered into an Amended and Restated Multi-Draw Credit Agreement with Sciences (the "Amended Credit Agreement"), which amended and restated the Credit Agreement, as reported in the current report on the Form 8-K filed with the SEC on April 29, 2020. During the year ended December 31, 2020, we received non-convertible advances of $150,000 and $300,000 pursuant to the Amended Credit Agreement. The advances bear interest at 7% per annum and mature on October 5, 2022. The net proceeds of each advance were used for general corporate purposes.
On March 29, 2021, we entered into amendment two to the Amended Credit Agreement to defer interest payments through the earlier of maturity or prepayment of the principal balance. On September 15, 2021, we further amended the Amended Credit Agreement to close our access to any further disbursements.
On November 17, 2022, we entered into an amendment to the Amended Credit Agreement, pursuant to which (i) the Company agreed to prepay 25% of the outstanding principal amount under the Amended Credit Agreement, equal to $616,125, plus all accrued interest of $328,737 (ii) the parties agreed to extend the maturity date to the earlier of December 30, 2022 or the Termination Date (as such term is defined in the Amended Credit Agreement), (iii) the parties agreed to amend the exercise price of the warrants to purchase Company common stock held by Sciences to $0.017 per share and (iv) the parties agreed to use good faith efforts to enter into a customary piggyback registration rights agreement. On December 14, 2022, the Company and Sciences entered into a piggyback registration rights agreement pursuant to which, among other things, the Company agreed to provide registration rights for the shares of common stock underlying the warrants to purchase Company common stock held by Sciences should the Company file a registration statement with the SEC for the purpose of effecting a public offering of common stock.
On December 30, 2022, we entered into an amendment to the Amended Credit Agreement to extend the maturity date to the earlier of (a) five business days after the closing of the sale of VDL (b) February 28, 2023 or (c) the Termination Date (as such term is defined in the Amended Credit Agreement).
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On May 18, 2022, Jim Heppell resigned from our board of directors and concurrently entered into a consulting agreement with us pursuant to which Mr. Heppell will provide mutually agreed upon services related to the wind down of EHT. The consulting agreement had an initial minimum term of one-year and will be automatically renewed for a one-year period on the anniversary of the contract unless terminated with 60 days' notice. Under the consulting agreement, Mr. Heppell was entitled to a monthly fee of $6,300, which was increased to $16,600 per month upon the closing of the Acquisition. The consulting agreement provides Mr. Heppell with a termination payment in an amount equal to the monthly fees through the then-remaining term of the agreement if Mr. Heppell’s engagement is terminated by us without cause. In addition, Mr. Heppell was awarded 4,000,000 stock options which are subject to certain performance and other conditions. The Company has accounted for the consulting contract as an in-substance severance arrangement and recognized $139,615 in severance expense during the year ended December 31, 2022. The accrual for Mr. Heppell's severance was adjusted to include the increased fee payments when the Company closed the Acquisition. As of December 31, 2022, the Company recognized $16,600, in accounts payable - related party and $75,503 in other current liabilities - related party under this consulting agreement.
As of December 31, 2022, Mr. Heppell is also a board member and the CEO of Sciences. Mr. Heppell also served on VivaCell's board until he tendered his resignation on January 10, 2022.
In addition, the Board Observer Agreement in place with Sciences was amended in September 2021 to allow any board member or officer of Sciences to act as a representative of Sciences on a non-voting observer basis in meetings of the Board. On December 14, 2021, the Board Observer Agreement was terminated.
Effective February 16, 2023, the Company and Sciences entered into a master transaction agreement (the "MTA"). Under the MTA, (i) Sciences agreed to exercise 16,641,486 warrants to purchase common stock of the Company (the "Warrants") (ii) the parties agreed that the aggregate exercise price for the Warrants of $282,905 was to be paid through a reduction in the debt owed by the Company to Sciences (the "Credit Consideration") under the Amended Credit Agreement.
On February 22, 2023, the Company issued 16,641,486 shares of common stock to Sciences in connection with the exercise of the Warrants. Pursuant to the terms of the MTA, after the application of the Credit Consideration to the amounts owed under the Amended Credit Agreement, Sciences agreed to convert the remaining balance of $1,597,236 owed by the Company to Sciences under the Amended Credit Agreement into 41,379,164 shares of common stock of the Company at a conversion price of $0.0386, in accordance with an amendment to the Amended Credit Agreement set forth in the MTA.
Following the issuance of shares described above, the Amended Credit Agreement was terminated in its entirety per the terms of the MTA. Additionally, under the MTA, Sciences agreed to use its best efforts to transfer all of the common stock of the Company held by Sciences to its shareholders on a pro-rata basis at or immediately prior to the Company's listing to a nationally recognized stock exchange, subject to compliance with applicable securities laws.
VivaCell Biotechnology España, S.L.U (formerly known as Emerald Health Biotechnology España, S.L.U.)
In January 2021 and April 2021, we entered into two separate Collaborative Research Agreements with VivaCell Biotechnology Espana, S.L.U ("VicaCell"), a research and development entity with substantial expertise in cannabinoid science and a subsidiary of Emerald Health Research, Inc. which is 100% owned by Sciences. Under the agreements, VivaCell will provide research and development services pursuant to agreed upon project plans for the research and development of SBI-200 and the preclinical development services for novel derivatives. The term of each agreement is initially for a one-year period. The agreements will terminate upon delivery and acceptance of the final deliverables under the project plans or if either party is in breach of the terms of the contract and such breach remains uncured for 45 days. Payment for services are based on the negotiated amounts for the completion of agreed upon objectives as provided in the Collaborative Research Agreements. For the years ended December 31, 2022 and 2021, we incurred $87,927 and $220,418, respectively, in expenses under the Collaborative Research Agreements. As of December 31, 2021, the Company has recognized a prepaid asset in the amount of $8,056 to be offset against future research and development costs under the Collaborative Research Agreements. No amounts were due to or from VivaCell under these agreements for the year ended December 31, 2022. The foregoing summary of the Collaborative Research Agreements do not purport to be complete and are qualified in their entirety by the full text of such agreement, a copy of which is attached as an exhibit hereto and incorporated by reference herein.
On October 11, 2021, we entered into an Exclusive Sponsored Research Agreement (the “ESRA”) with VivaCell to fund certain research and development programs which are of mutual interest to both the Company and VivaCell. We will have the right to use all data, products, and information, including intellectual property which are generated in the performance of the research under each and all projects funded by the Company pursuant to the ESRA, and VivaCell assigns and agrees to assign, to us all rights to any intellectual property created or reduced-to-practice under, or as a part of, a project funded by us pursuant to the ESRA. The foregoing summary of the ESRA does not purport to be complete and is qualified in its entirety by the full text of such agreement, a copy of which is attached as an exhibit hereto and incorporated by reference herein.
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We have agreed to pay to VivaCell a royalty based on any and all licensing revenue or other consideration paid to us by a third-party licensee, assignee or purchaser of intellectual property rights created under the ESRA. In addition, upon a change of control transaction we have agreed to pay an amount equal to the royalty percentage multiplied by the fair value of the intellectual property created under the ESRA. Pursuant to the ESRA, VivaCell will provide a budget to be approved by us for each project, and we will make payments in accordance with the approved budget and pay an annual retainer to VivaCell of $200,000 per year. The initial term of the agreement is one year, with automatic renewal for successive one-year terms unless either party terminates upon 60 days' prior written notice to the other party pursuant to the ESRA. For the years ended December 31, 2022 and 2021, we incurred $200,000 and $44,624 in expenses under the ESRA. As of December 31, 2022 and 2021, we recognized accounts payable of $50,000 and a prepaid asset in the amount of $5,376 to be offset against future research and development costs under the ESRA.
On March 1, 2022, we entered into a research project with VivaCell under the ESRA Agreement for the development of a screening platform for anteroposterior ocular diseases. The project budget is $190,500. For the year ended December 31, 2022, we incurred $167,000 of research and development expenses under the ESRA. As of December 31, 2022, we recognized $7,835, in other current liabilities - related parties related to the first research project. As of December 31, 2022, we recognized $47,001, in accounts payable - related parties under this agreement.
Review, Approval and Ratification of Related Party Transactions
It is the Company's policy that all related party transactions must be approved by directors independent of the parties involved. All of the transactions described above were approved and ratified by the independent members of our Board. In connection with the approval of the transactions described above, our Board took into account several factors, including their fiduciary duties to the Company, the relationships of the related parties described above to the Company, the material facts underlying each transaction, the anticipated benefits to the Company and related costs associated with such benefits, whether comparable products or services were available, and the terms we could receive from an unrelated third party.
Conflicts Related to Other Business Activities
The persons serving as our officers and directors have existing responsibilities and, in the future, may have additional responsibilities, to provide management and services to other entities in addition to us. As a result, conflicts of interest between us and the other activities of those persons may occur from time to time.
We will attempt to resolve any such conflicts of interest in our favor. Our officers and directors are accountable to our shareholders and us as fiduciaries, which requires that such officers and directors exercise good faith and integrity in handling our affairs. A shareholder may be able to institute legal action on our behalf or on behalf of that shareholder and all other similarly situated shareholders to recover damages or for other relief in cases of the resolution of conflicts in any manner prejudicial to us.
Director Independence
We have determined that Dr. Margaret Dalesandro, Dr. Praveen Tyle, Dr. Keith Ward and Dr. Deborah Charych are independent members of our Board, as that term is defined in Rule 5605(a)(2) of the Nasdaq Listing Rules.
Item14. Principal Accounting Fees and Services.
Audit Fees
The aggregate fees billed for each of the fiscal years ended December 31, 2022 and 2021, for professional services rendered by Mayer Hoffman McCann P.C. for the audit of our annual consolidated financial statements included in our Annual Report on Form 10-K and quarterly reviews of the unaudited interim consolidated financial statements included in our Quarterly Reports on Form 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the years ended December 31, 2022 and 2021 were $36,292 and $366,736, respectively. Substantially all MHM’s personnel, who work under the control of MHM shareholders, are employees of wholly owned subsidiaries of CBIZ, Inc., which provides personnel and various services to MHM in an alternative practice structure.
The aggregate fees billed for each of the fiscal years ended December 31, 2022 and 2021, for professional services rendered by Marcum LLP. for the audit of our annual consolidated financial statements included in our Annual Report on Form 10-K and quarterly reviews of the unaudited interim consolidated financial statements included in our Quarterly Reports on Form 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the years ended December 31, 2022 and 2021 were $125,861 and $—, respectively.
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Audit Related Fees
None.
Tax Fees
None.
All Other Fees
None.
Pre-Approval Policies and Procedures
Prior to engaging Mayer Hoffman McCann P.C. and Marcum LLP to perform audit services, our Board obtains an estimate for the service to be performed. All of the services described above were approved by the members of the Audit Committee of the Board in accordance with its procedures.
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PARTIV
Item15. Exhibits, Financial Statement Schedules.
Financial Statements. The following consolidated financial statements of Skye Bioscience, Inc., together with the report thereon of Marcum LLP, an independent registered public accounting firm (PCAOB Firm No. 688), are included in this Annual Report on Form 10-K.
Financial Statements. The following consolidated financial statements of Skye Bioscience, Inc., together with the report thereon of Mayer Hoffman McCann P.C., an independent registered public accounting firm (PCAOB Firm No. 199), are included in this Annual Report on Form 10-K.
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SKYE BIOSCIENCE, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
Reports of Independent Registered Public Accounting Firms F-2
Consolidated Balance Sheets as of December 31, 2022 and 2021 F-4
Notes to the Consolidated Financial Statements F-9
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REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Skye Bioscience, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Skye Bioscience, Inc. (the “Company”) as of December 31, 2022, the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the year ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph - Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ Marcum LLP
Marcum LLP
We have served as the Company's auditor since 2022.
East Hanover, New Jersey
March 31, 2023
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REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Skye Bioscience, Inc. and Subsidiaries:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Skye Bioscience, Inc., formerly known as Emerald Bioscience, Inc., and Subsidiaries ("Company") as of December 31, 2021, and the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred recurring operating losses and is dependent on additional financing to fund operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 1 to the financial statements. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there were no critical audit matters.
/s/ Mayer Hoffman McCann P.C.
We have served as the Company's auditor from 2014 to 2022.
Irvine, California
March 25, 2022
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SKYE BIOSCIENCE, INC. AND SUBSIDIARIES
CONSOLIDATEDBALANCE SHEETS
December 31
Current assets
Prepaid expenses - related party — 13,432
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities
Other current liabilities - related parties 95,850 —
Estimate for legal contingency 6,205,310 —
Multi-draw credit agreement - related party — 450,000
Operating lease liability, current portion 78,700 82,372
Non-current liabilities
Operating lease liability, net of current portion — 78,700
Commitments and contingencies (Note 14)
Stockholders’ (deficit) equity
Total liabilities and stockholders’ (deficit) equity $ 9,111,072 $ 9,855,088
See accompanying notes to the consolidated financial statements.
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SKYE BIOSCIENCE, INC. AND SUBSIDIARIES
CONSOLIDATEDSTATEMENTS OF OPERATIONS
Year Ended December 31
Operating expenses
Estimated legal contingency 6,205,310 —
Other expense
Change in fair value of derivative liability (59,729) 21,165
Gain on forgiveness of PPP loan — (117,953)
Loss per common share
See accompanying notes to the consolidated financial statements.
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SKYE BIOSCIENCE, INC. AND SUBSIDIARIES
CONSOLIDATEDSTATEMENTS OF CASH FLOWS
Year Ended December 31
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Finance charge from Sciences warrant modification 120,228 —
Change in fair value of derivative liability (59,729) 21,165
Amortization of debt discount - related party 489,595 593,802
Estimate for legal contingency 6,205,310 —
Gain on debt forgiveness — (117,953)
Changes in assets and liabilities:
Other asset — (8,309)
Other current liabilities - related parties 95,850 —
Cash flows from investing activities:
Cash divested net of proceeds from the sale of an asset (66,458) —
Purchases of property and equipment (28,060) (90,866)
Cash flows from financing activities:
Proceeds from warrant exercises — 6,999,999
Proceeds from pre-funded warrant exercises 1,967 11,800
Proceeds from option exercises — 4,783
Repayment of loan payable (275,537) —
Proceeds from EHT bridge financing 680,901 —
Repayment of Amended Credit Agreement (616,125) —
Cash, cash equivalents and restricted cash, end of year $ 1,249,107 $ 8,987,578
Supplemental disclosures of cash-flow information:
Reconciliation of cash and restricted cash:
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Cash paid during the year for:
Supplemental disclosures of non-cash financing activities:
Purchases of property and equipment in other current liabilities 11,300 —
Financing of D&O insurance premium 275,537 —
Release of share liability 13,000 —
Stock issued for assets, net of equity issuance costs 3,074,098 —
See accompanying notes to the consolidated financial statements.
F-7
SKYE BIOSCIENCE, INC. AND SUBSIDIARIES
CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
Stockholders' (Deficit) Equity
Shares Amounts
Finance charge from Sciences warrant modification — — 120,228 — 120,228
See accompanying notes to the consolidated financial statements.
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SKYE BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 clinical stage pharmaceutical company located in San Diego, California that researches, develops and plans to commercialize cannabinoid derivatives through its own directed research efforts and through multiple 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 and each share of EHT common stock outstanding immediately prior to the effective time of the Acquisition was transferred to the Company in exchange for 1.95shares of the Company's common stock (the “Exchange Ratio”).
In addition, on November 10, 2022, EHT entered into a share purchase agreement with a third party for the sale of EHT's wholly owned subsidiary, Verdélite Sciences, Inc. for an aggregate purchase price of $9,385,064, subject to certain adjustments (the "Verdélite SPA"). The sale of this subsidiary will complete the divestiture of EHT's most significant former operating assets (Note 3).
As of December 31, 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 December 31, 2022, had a working capital deficit of $3,175,408 and an accumulated deficit of $66,737,765. As of December 31, 2022, the Company had unrestricted cash in the amount of $1,244,527. For the years ended December 31, 2022 and 2021, the Company incurred losses from operations of $18,311,732 and $7,847,714, respectively. For the years ended December 31, 2022 and 2021, the Company incurred net losses of $19,481,602 and $8,522,182, respectively. The Company expects to continue to incur significant losses and negative cash flows from operations through 2023 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 has recently begun its Phase 1 clinical trial in December 2022, it has increased research and development spending and increased cash used in operating activities. During the year ended December 31, 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 Acquisition. 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 3). These two factors, among others, have resulted in an overall increase in cash used in operating activities for the year ended December 31, 2022. Based on the Company’s expected cash requirements, management expects that the Company will be able to complete its Phase 1 clinical trial. However, if the Company cannot obtain additional funding by the second half of 2023, it will not have enough funds to continue clinical studies. These conditions give rise to substantial doubt as to the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.
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On November 10, 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 the second quarter of 2023, and that the Company expects to collect payments from the sale of VDL through 2026.
During the year ended December 31, 2022, the Company met its operational funding requirements during the pre-closing period by, among other things, laying off two employees and entering into a $700,000 working capital Loan Agreement with EHT (Note 3). In 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 (Note 15). However, the Company cannot provide any assurances that the additional funding needed to 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.
Further, in January 2023, the Company was subject to an unfavorable outcome in a lawsuit with a former employee which resulted in the recognition of an estimated legal contingency of $6,205,310. The Company strongly believes that this case was incorrectly decided as to liability, the amount of compensatory damages, and the appropriateness and amount of punitive damages. The Company intends to vigorously challenge the verdict in the trial court and appeal and pursue reimbursement under its existing insurance policies. However, the outcome of the litigation and the amount recoverable under its existing insurance policies, if any, is inherently uncertain (Note 14).
On October 5, 2018, the Company entered into a Multi-Draw Credit Agreement (the "Credit Agreement") with Emerald Health Sciences ("Sciences"), a related party (See Note 13). On April 29, 2020, the Company entered into an Amended and Restated Multi-Draw Credit Agreement (the "Amended Credit Agreement") with Sciences. As of December 31, 2022, the Company had an outstanding principal balance of $1,848,375 under the Amended Credit Agreement. The outstanding advances plus accrued interest under the Amended Credit Agreement were due on October 5, 2022 and the Company executed an extension of the maturity date to December 30, 2022 in exchange for the repricing of Sciences warrants and the repayment of 25% of the outstanding principal balance plus accrued interest. The Company subsequently negotiated an additional extension of the maturity date to the earlier of February 28, 2023 or the closing Verdélite SPA. On February 16, 2023, Sciences exercised all of its outstanding warrants and converted the remaining balance of the Amended Credit Agreement (See Notes 5 & 15).
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, the common ownership interest by Sciences in both Skye and EHT was eliminated. On February 16, 2023, Sciences covenanted to use it best efforts to distribute its shareholdings in SKYE to the individual shareholders of Sciences upon Skye listing to a national exchange.
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.
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 the Company can obtain, any potential additional funding.
Notably, the Company relies on third party manufacturers to produce its product candidates. The manufacturing of SBI-100 OE is conducted in the United States 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.
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After considering the plans to alleviate substantial doubt, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The accompanying 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
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and the accompanying notes. Actual results could differ from those estimates.
Assets Held for Sale
On November 10, 2022, the Company completed the Acquisition of EHT in accordance with the Arrangement Agreement. At the time of the Acquisition there were arrangements in place to sell the acquired assets and liabilities that comprised of two of EHT's subsidiaries, Emerald Health Therapeutics Canada, Inc. ("EHTC") and Verdélite Sciences, Inc. ("VDL"). As a result, EHTC and VDL were considered held for sale since the Acquisition and the Company has classified the associated assets of VDL as held for sale on the Consolidated Balance Sheets and the period costs related to both EHTC and VDL have been presented as wind-down costs in the Consolidated Statements of Operations. EHTC was divested on December 28, 2022 (see Note 3).
Assets that meet the held for sale criteria are held for sale and reported at the lower of their carrying value or their fair value, less estimated costs to sell. Changes in fair value are recorded as a gain or loss in the results of operations but not to exceed the original carrying value. The divestiture of VDL was completed after the balance sheet date on February 9, 2023, refer to Note 15 - Subsequent events for further detail.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries SKYE Bioscience Australia, EHT, Avalite Sciences, Inc. ("AVI"), VDL, EHTC and Nemus Sub. All intercompany accounts and transaction have been eliminated in consolidation.
Use of Estimates
The preparation of the 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 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 judgments as to the appropriate carrying values of equity instruments, debt with embedded features, estimates related to the Company's estimation of the percentage of completion under its research and development contracts, contingent legal liabilities, fair value of assets acquired in the Acquisition, 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, Canada, the European Union and Australia, and the Company’s ability to attract new funding.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The carrying values of those investments approximate their fair value due to their short maturity and liquidity. Cash includes cash on hand and amounts on deposit with financial institutions, which amounts may at times exceed federally insured limits. The Company has not experienced any losses on such accounts and does not believe it is exposed to any significant credit risk. As of December 31, 2022, and 2021, the Company has $25,842 and $— cash equivalents, respectively.
Restricted cash on the balance sheet represents a certificate of deposit held by the Company’s bank as collateral for the Company’s credit cards.
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Property, Plant and Equipment, net
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, generally three to five years. Leasehold improvements are amortized over the shorter of the estimated useful life of the improvements or the remaining lease term. Expenditures for repairs and maintenance, which do not extend the useful life of the property and equipment, are expensed as incurred. Upon retirement, the asset cost and related accumulated depreciation are relieved from the accompanying Consolidated Balance Sheets.
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 5).
Income Taxes
The Company accounts for deferred income tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities, net operating loss carryforwards (the “NOLs”) and other tax credit carryforwards. These items are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date. Any interest or penalties would be recorded in the Company’s Consolidated Statements of Comprehensive Income (Loss) in the period incurred. When necessary, the Company recognizes interest and penalties related to income tax matters in income tax expense.
The Company records a valuation allowance against deferred tax assets to the extent that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In making such determinations, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. Due to the substantial doubt related to the Company’s ability to utilize its deferred tax assets, a valuation allowance for the full amount of the deferred tax assets has been established at December 31, 2022 and 2021. As a result of this valuation allowance, there are no income tax benefits reflected in the accompanying Consolidated Statements of Comprehensive Income (Loss) to offset pre-tax losses.
The Company recognizes a tax benefit from uncertain tax positions when it is more likely than not (50%) that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position.
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 GAAP 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.
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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.