Skye Bioscience, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements (unaudited) for the three months ended March 31, 2024 and 2023, together with the notes thereto and the consolidated financial statements and the related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited, to those set forth under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Statements in this Quarterly Report on Form 10-Q contain forward-looking statements that are based on management’s current expectations and assumptions and information currently available to management and are subject to risks and uncertainties. If such risks or uncertainties materialize or such assumptions prove incorrect, our business, operating results, financial condition and stock price could be materially and negatively affected. In some cases, you can identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” “will,” “would” or the negative of these terms or other comparable terminology. Factors that could cause actual results to differ materially from those currently anticipated include those set forth in the section below titled “Risk Factors,” including, without limitation, risks relating to: • the results of our research and development activities, including uncertainties relating to the discovery of potential product candidates and the preclinical and clinical testing of our product candidates; • the timing, progress and results of our clinical studies for SBI-100 Ophthalmic Emulsion (SBI-100 OE) and Nimacimab and our estimates regarding the market opportunity for SBI-100 OE and Nimacimab if approved; • the early stage of our product candidates presently under development; • our ability to obtain and, if obtained, maintain regulatory approval of our current product candidates, and any of our other future product candidates, and any related restrictions, limitations, and/or warnings in the label of any approved product candidate; • our ability to retain or hire key scientific or management personnel; • our ability to protect our intellectual property rights that are valuable to our business, including patent and other intellectual property rights; • our dependence on University of Mississippi, third party manufacturers, suppliers, research organizations, testing laboratories and other potential collaborators, including global supply chain disruptions; • our ability to develop successful sales and marketing capabilities in the future as needed; • the size and growth of the potential markets for any of our current product candidates, and the rate and degree of market acceptance of any of our current product candidates; • competition in our industry; • regulatory developments in the United States and foreign countries; and • current pending litigation matters, including the Cunning Lawsuit. 18 We operate in a rapidly changing environment and new risks emerge from time to time. As a result, it is not possible for our management to predict all risks, including the current global economic environment, the impacts of the high inflationary environment, and associated business disruptions such as delayed clinical trials, laboratory resources and supply chain limitations, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. The forward-looking statements included in this report speak only as of the date hereof, and except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations. Unless otherwise provided in this Quarterly Report, references to “we,” “us,” “our” and “Skye” in this discussion and analysis refer to Skye Bioscience, Inc., a Nevada corporation, together with its wholly owned subsidiaries, Nemus, a California corporation, SKYE Bioscience Pty Ltd ("SKYE Bioscience Australia"), an Australian proprietary limited company, Emerald Health Therapeutics, Inc. (EHT) a corporation governed by the Business Corporations Act (British Columbia), Bird Rock Bio Sub, Inc. ("BRB"), a Delaware corporation, Ruiyi Acquisition Corp, a Delaware corporation and Avalite Sciences, Inc. (AVI) a corporation governed by the Business Corporations Act (British Columbia). Overview We are a clinical stage biopharmaceutical company with a mission to pioneer and lead the development of new pharmaceutical products that unlock the potential of the endocannabinoid system (the "ECS"). Our strategy and clinical assets focus, initially, on the modulation of the CB1 axis to advance the standard of care and provide novel alternative therapies to treat diseases with neuropathic, inflammatory, and metabolic conditions. Our lead clinical program's product candidate, Nimacimab, is a peripherally-restricted negative allosteric modulating antibody specific for the human CB1 receptor, administered as a subcutaneous injectable for the treatment of metabolic disorders, including obesity. We plan to launch a Phase 2 clinical trial of Nimacimab, which will include a combination study with a GLP-1 agonist, to treat obesity in Q3 2024, with final data in late 2025. Our other product candidate, SBI-100 OE, is a Phase 2-stage CB1 agonist (activator) delivered topically into the eye for the treatment of glaucoma and ocular hypertension. Our proprietary eye drop is a nanoemulsion formulation that has been developed in a way that provides enhanced bio-availability and permeability, while also extending the duration of activity. In February 2024, we announced the completion of patient enrollment in our Phase 2a placebo-controlled study designed to treat glaucoma and ocular hypertension and are expecting to report data in Q2 2024. In preclinical experiments using SBI-100 OE we have demonstrated statistically superior IOP-lowering compared to the prostaglandin-based therapy, latanoprost, the current standard-of-care for treating glaucoma. Statistical significance was reached across multiple time points during a seven-day course of dosing using a validated rabbit normotensive ocular model and SBI-100 OE exerted pharmacologic activity consistent with once-daily to twice-daily dosing. We believe that both of our drug candidates are differentiated in their respective markets and target indications with a large unmet need. Because the modulation of the ECS through CB1 has been shown to play a role in both glaucoma and obesity, we are developing both these products as either first or second-line therapies. In January 2024 and March 2024, we completed two private placement equity transactions with institutional accredited investors, in which we raised combined net aggregate proceeds of approximately $83,556,563. We expect the capital from the January and March PIPE financings will allow us to fund both of our planned clinical trials for glaucoma and obesity through top-line Phase 2 data. We were incorporated under the laws of the State of Nevada on March 16, 2011 and our headquarters are based in San Diego, CA. Since our incorporation, we have devoted substantially all of our efforts to building our product portfolio through the acquisition of clinical assets and licensing agreements, carrying out research and development, building infrastructure and raising capital. 19 Financial Overview Revenues To date, we have not generated any revenue. We do not expect to receive any revenue from any drug candidates that we develop unless and until we obtain regulatory approval for, and commercialize, our drug candidates or generate revenue from collaborative agreements with third parties. Research and Development Expenses During the three months ended March 31, 2024, we incurred $1,946,450 in research and development expenses primarily related to our efforts in conducting the Phase 2a SBI-100 OE clinical trial. During the three months ended March 31, 2023, we incurred $1,184,880 in research and development expense primarily related to our efforts in conducting the Phase 1 SBI-100 OE clinical trial. We expect that our ongoing research and development expenses will consist of costs incurred for the development of our drug candidates, including, but not limited to: • license fees; • employee-related expenses, which include salaries, benefits and stock-based compensation; • payments to third party contract research organizations and investigative sites; and • payments to third party manufacturing organizations and consultants. We expect to incur future research and development expenditures to support our nonclinical and clinical studies. Nonclinical activities include laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies to assess safety and efficacy. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time consuming and the successful development of our drug candidates is highly uncertain. Our future research and development expenses will depend on the clinical success of each of our drug candidates as well as ongoing assessments of the commercial potential of such drug candidates. In addition, we cannot forecast with any degree of certainty which drug candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements. We expect to incur increased research and development expenses in the future as we continue our efforts towards advancing our lead program for Nimacimab. General and Administrative Expenses Our general and administrative expenses have fluctuated year-over-year as we have entered into various strategic acquisitions to restructure and reposition our company. Additionally, as a business in the early stages of drug development we are in the process of scaling our operations by hiring additional employees and building the infrastructure necessary to increase efficiencies. These initiatives have resulted in additional costs related to the implementation of certain systems, insurance, legal and accounting costs related to operating as a public company. To incentivize our employees and be competitive to retain strong talent we issued additional equity awards in 2023 and 2024, which have resulted in increased stock-based compensation expense. We expect that our general and administrative expenses will continue to increase in the future in order to support our expected increase in research and development activities, including increased salaries and other related costs, stock-based compensation and consulting fees for executive, finance, accounting and business development functions. We also expect general and administrative expenses to increase as a result of additional costs associated with being a public company, including expenses related to compliance with the rules and regulations of the SEC, additional insurance expenses, investor relations activities and other administration and professional services. Other significant costs are expected to include legal fees relating to patent and corporate matters, facility costs and fees for accounting and other consulting services. Other (Income) Expense Other (income) expense primarily includes a gain from the sale of the AVI building, interest income and interest expense incurred from our short term convertible debt. Critical Accounting Estimates There have been no material changes in our Critical Accounting Estimates from the information provided in the "Critical Accounting Estimates" section of "Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K. Recently Issued and Adopted Accounting Pronouncements 20 See Note 1 to the accompanying Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information on recently issued accounting pronouncements and recently adopted accounting pronouncements. While we expect certain recently adopted accounting pronouncements to impact our estimates in future periods, the impact upon adoption was not significant to our current estimates and operations. Results of Operations Comparison of the three months ended March 31, 2024 and 2023 Research and Development Expenses Below is a summary of our research and development expenses during the three months ended March 31, 2024 and to the same period in 2023: Three Months Ended March 31, 2024 2023 $ Change 2024 vs. 2023 % Change 2024 vs. 2023 Research and development expenses $ 1,946,450 $ 1,184,880 $ 761,570 64 % Research and development expenses for the three months ended March 31, 2024, increased by $761,570 as compared to the same period in 2023. The net increase in research and development expenses was primarily due to an increase of $379,516 in research and development salaries and equity based compensation, a net increase of $345,465 in contracted clinical costs associated with clinical trial expenses from conducting our Phase 2a glaucoma study and the preparation for our Phase 2 obesity study which were offset by decreases in contract manufacturing costs. General and Administrative Expenses Below is a summary of our general and administrative expenses during the three months ended March 31, 2024 and to the same period in 2023: Three Months Ended March 31, 2024 2023 $ Change 2024 vs. 2023 % Change 2024 vs. 2023 General and administrative expenses $ 4,205,800 $ 1,915,278 $ 2,290,522 120 % General and administrative expenses for the three months ended March 31, 2024, increased by $2,290,522 as compared to the same period in 2023. The increase in general and administrative expenses was primarily due to an increase in salaries and benefits of $2,053,956 from the recognition of stock based compensation expense due to the achievement of certain performance based milestones related to restricted stock units granted to members of management and members of the board of directors of the Company. Other increases include other general business expenses and administrative fees, consulting and insurance fees of $103,187 and $81,503 and $51,750, respectively. These increases were offset by a decrease of $99,308 in investor relations costs. 21 Other (Income) Expense Below is a summary of our other (income) expense for the three months ended March 31, 2024 and and to the same period in 2023: Three Months Ended March 31, 2024 2023 $ Change 2024 vs. 2023 % Change 2024 vs. 2023 Interest expense $ 436,936 $ 18,396 $ 418,540 2275 % Interest income (426,514) (24,514) (402,000) 1640 (Gain) loss from asset sales (1,145,141) 307,086 (1,452,227) (473) Debt conversion inducement expense — 1,383,285 (1,383,285) (100) Wind-down costs — 383,109 (383,109) (100) Total other (income) expense $ (1,134,719) $ 2,067,362 $ (3,202,081) (155) % For the three months ended March 31, 2024, we had net other income of $1,134,719 related primarily to the gain on the sale of the AVI building of $1,145,141, an increase in interest income of $402,000, offset by an increase of $418,540 related party interest expense from the Convertible Note. In addition, during 2023 we incurred a one-time debt conversion inducement expense of $1,383,285 and recognized wind down costs of $383,109 from the EHT Acquisition. Liquidity and Capital Resources Liquidity We have incurred operating losses and negative cash flows from operations since our inception and as of March 31, 2024, we had working capital of $78,769,157, an accumulated deficit of $109,402,080, and stockholders’ equity of $78,883,393. We had unrestricted cash in the amount of $83,342,907 as of March 31, 2024, as compared to $1,256,453 as of December 31, 2023. For the three months ended March 31, 2024 and 2023, the Company incurred losses from operations of $6,152,250 and $3,100,158, respectively. For the three months ended March 31, 2024 and 2023, the Company incurred net losses of $5,019,531 and $5,167,520, respectively. In January 2024 and March 2024, we completed two private placement equity transactions with institutional accredited investors, in which we raised combined net aggregate proceeds of approximately $83,500,000. We believe that the capital from the January and March PIPE financings will allow us to fund both of our planned clinical trials for glaucoma and obesity through top line Phase 2 data. The Company’s condensed consolidated financial statements have been prepared on the basis of the Company continuing as a going concern for the next 12 months. Based on its current operational requirements, the Company believes that its current ca sh will be sufficient to fund its projected operations for at least 12 months from the date of the issuance of these consolidated financial statements. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect. Additionally, the process of testing product candidates in clinical trials is costly, and the timing of progress and expenses in these trials is uncertain. Our future capital requirements will depend on many factors, including: • the scope, rate of progress, results and costs of our clinical trials, preclinical studies and other related activities; • our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements; • the timing of, and the costs involved in, obtaining regulatory approvals for any of our current or future drug candidates; • the number and characteristics of the drug candidates we seek to develop or commercialize; • the cost of manufacturing clinical supplies, and establishing commercial supplies, of our drug candidates; • the cost of commercialization activities if any of our current or future drug candidates are approved for sale, including marketing, sales and distribution costs; • the expenses needed to attract and retain skilled personnel; • the costs associated with being a public company; • the amount of revenue, if any, received from commercial sales of our drug candidates, should any of our drug candidates receive marketing approval; and 22 • the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing possible patent claims, including litigation costs and the outcome of any such litigation. Cash Flows The following is a summary of our cash flows for the periods indicated and has been derived from our Unaudited Condensed Consolidated Financial Statements which are included elsewhere in this Form 10-Q: Three Months Ended March 31, 2024 2023 Net cash used in operating activities $ (4,708,123) $ (4,060,923) Net cash provided by investing activities 1,141,960 5,530,406 Net cash provided by (used in) financing activities 85,652,617 (45,307) Cash Flows from Operating Activities The primary use of cash for our operating activities during the period was to fund research development activities for our preclinical and clinical product candidates and general and administrative activities. Our cash used in operating activities also reflected changes in our working capital, net of adjustments for non-cash charges, such as stock-based compensation, depreciation and amortization, amortization of debt discount and the (gain) loss from divestiture of assets. Cash used in operating activities of $4,708,123 during the three months ended March 31, 2024, reflected a net loss of $5,019,531, partially offset by aggregate non-cash charges of $1,597,803 and included a $1,286,395 net change in our operating assets and liabilities. Non-cash charges included $2,478,179 for stock-based compensation expense primarily attributable to the vesting of restricted stock units related to the achievement of certain market based performance milestones, $237,205 in non-cash interest expense debt amortization expense and a $1,145,141 gain from the sale of a real estate asset. The net change in our operating assets and liabilities included an $832,790 cash outflow from changes in our prepaid expenses and other current assets, a $392,953 net cash outflow from changes in our accrued expenses and other current liabilities and a $60,652 cash outflow from the repayment of our accounts payable. Cash used in operating activities of $4,060,923 during the three months ended March 31, 2023, reflected a net loss of $5,167,520, partially offset by aggregate non-cash charges of $1,825,725 and included a $719,128 net change in our operating assets and liabilities. Cash Flows from Investing Activities During the three months ended March 31, 2024, the Company purchased $3,181 in machinery and office equipment and recognized $1,145,141 in net proceeds from the sale of the AVI building. During the three months ended March 31, 2023, the Company purchased $1,860 in machinery office equipment. During the three months ended March 31, 2023, the Company received $5,532,266 in proceeds related to the divestiture of VDL. Cash Flows from Financing Activities Cash flows from financing activities primarily reflect proceeds from the sale of our securities and loan repayments. During the three months ended March 31, 2024, cash provided by financing activities included $85,652,617 in proceeds received in connection with the January and March PIPE Financings, net of issuance costs. During the three months ended March 31, 2023, cash used in financing activities included a $45,307 repayment on our insurance premium loan payable. Off-Balance Sheet Arrangements There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Item 3. Quantitative and Qualitative Disclosures about Market Risk. Not applicable. 23