Skye Bioscience, Inc. 10-Q

Item 1. Financial Statements 3 SKYE BIOSCIENCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2024 December 31, 2023 (Unaudited) ASSETS Current assets Cash and cash equivalents $ 74,120,854 $ 1,256,453 Restricted cash 9,080,202 9,080,202 Prepaid expenses 1,096,039 194,259 Other current assets 2,707,368 1,119,929 Total current assets 87,004,463 11,650,843 Property and equipment, net 45,772 43,276 Operating lease right-of-use asset 202,987 237,983 Other assets 8,309 8,309 Total assets $ 87,261,531 $ 11,940,411 LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) Current liabilities Accounts payable $ 1,079,493 $ 1,155,785 Accrued interest - related party 124,658 126,027 Accrued payroll liabilities 556,573 888,381 Accrued interest - legal contingency 384,896 234,750 Other current liabilities 1,184,795 998,552 Estimate for legal contingency 6,053,468 6,053,468 Convertible note - related party, net of discount 4,859,525 4,371,998 Operating lease liability, current portion 79,165 72,038 Total current liabilities 14,322,573 13,900,999 Non-current liabilities Operating lease liability, net of current portion 129,907 171,230 Total liabilities 14,452,480 14,072,229 Commitments and contingencies (Note 9) Stockholders’ equity (deficit) Preferred stock, $ 0.001 par value; 200,000 shares authorized at June 30, 2024 and December 31, 2023; no shares issued and outstanding at June 30, 2024 and December 31, 2023 — — Common stock, $ 0.001 par value; 100,000,000 shares authorized at June 30, 2024 and December 31, 2023; 28,067,907 and 12,349,243 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively 28,068 12,349 Additional paid-in-capital 190,085,879 102,238,382 Accumulated deficit ( 117,304,896 ) ( 104,382,549 ) Total stockholders’ equity (deficit) 72,809,051 ( 2,131,818 ) Total liabilities and stockholders’ equity (deficit) $ 87,261,531 $ 11,940,411 See accompanying notes to the unaudited condensed consolidated financial statements. 4 SKYE BIOSCIENCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Three Months Ended June 30, For the Six Months Ended June 30, 2024 2023 2024 2023 Operating expenses Research and development $ 4,078,751 $ 1,788,434 $ 6,025,201 $ 2,973,314 General and administrative 4,326,820 1,206,405 8,532,620 3,121,683 Estimated legal contingency — ( 151,842 ) — ( 151,842 ) Total operating expenses 8,405,571 2,842,997 14,557,821 5,943,155 Operating loss ( 8,405,571 ) ( 2,842,997 ) ( 14,557,821 ) ( 5,943,155 ) Other (income) expense Interest expense 450,052 186,429 886,988 204,828 Interest income ( 961,237 ) ( 8,598 ) ( 1,388,791 ) ( 33,112 ) (Gain) loss from asset sales — — ( 1,145,141 ) 307,086 Debt conversion inducement expense — — — 1,383,285 Wind-down costs — 87,072 — 470,181 Other expense (income) 359 — 1,399 ( 3 ) Total other (income) expense, net ( 510,826 ) 264,903 ( 1,645,545 ) 2,332,265 Loss before income taxes ( 7,894,745 ) ( 3,107,900 ) ( 12,912,276 ) ( 8,275,420 ) Provision for income taxes 8,071 3,600 10,071 3,600 Net loss $ ( 7,902,816 ) $ ( 3,111,500 ) $ ( 12,922,347 ) $ ( 8,279,020 ) Loss per common share: Basic $ ( 0.20 ) $ ( 0.80 ) $ ( 0.39 ) $ ( 2.16 ) Diluted $ ( 0.20 ) $ ( 0.80 ) $ ( 0.39 ) $ ( 2.16 ) Weighted average shares of common stock outstanding used to compute earnings per share: Basic 38,669,330 3,886,198 33,334,616 3,827,216 Diluted 38,669,330 3,886,198 33,334,616 3,827,216 See accompanying notes to the unaudited condensed consolidated financial statements. 5 SKYE BIOSCIENCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Six Months Ended June 30, 2024 2023 Cash flows from operating activities: Net loss $ ( 12,922,347 ) $ ( 8,279,020 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 57,350 67,091 Stock-based compensation expense 4,306,653 234,450 Amortization of debt discount 487,527 — Write-down of vendor deposits 246,000 — Estimate for legal contingency — 30,329 (Gain) loss from divestiture of assets ( 1,145,141 ) 307,086 Loss from disposal of assets 10,794 — Debt conversion inducement expense — 1,383,285 Accrued interest conversion expense — 15,952 Foreign currency remeasurement gain — ( 45,350 ) Changes in assets and liabilities: Prepaid expenses ( 901,780 ) 714,152 Other current assets ( 1,833,439 ) ( 432,975 ) Accounts payable ( 76,292 ) ( 118,487 ) Accounts payable - related parties — ( 16,600 ) Accrued interest - related party ( 1,369 ) — Accrued interest - legal contingency 150,146 — Accrued payroll liabilities ( 331,808 ) 256,195 Operating lease liability ( 34,196 ) ( 45,794 ) Other current liabilities 186,243 ( 28,995 ) Other current liabilities - related parties — ( 94,078 ) Net cash used in operating activities ( 11,801,659 ) ( 6,052,759 ) Cash flows from investing activities: Proceeds from the sale of assets, net of sales costs 1,145,141 5,532,266 Purchase of property and equipment ( 35,644 ) ( 1,860 ) Net cash provided by investing activities 1,109,497 5,530,406 Cash flows from financing activities: Proceeds from the issuance of common stock and warrants, net of equity issuance costs of $ 6,434,447 83,556,563 — Repayment of insurance premium loan payable — ( 168,720 ) Net cash provided by (used in) financing activities 83,556,563 ( 168,720 ) Net increase (decrease) in cash and restricted cash 72,864,401 ( 691,073 ) Cash, cash equivalents and restricted cash , beginning of period $ 10,336,655 $ 1,249,107 Cash, cash equivalents and restricted cash, end of period $ 83,201,056 $ 558,034 Supplemental disclosures of cash-flow information: Reconciliation of cash, cash equivalents and restricted cash: Cash, and cash equivalents $ 74,120,854 $ 553,443 Restricted cash 9,080,202 4,591 Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows $ 83,201,056 $ 558,034 6 Supplemental disclosures of non-cash financing activities: Common stock warrant exercises $ — $ 282,905 Conversion of multi-draw credit agreement — 1,565,470 Conversion of accrued interest due to related party — 31,766 Financing of insurance premium — 203,884 Release of share liability to additional paid-in-capital — 241,134 See accompanying notes to the unaudited condensed consolidated financial statements. 7 SKYE BIOSCIENCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED) Common Stock Additional Paid-In Capital Accumulated Deficit Total Stockholders’ Equity/ (Deficit) Shares Amounts Balance, January 1, 2024 12,349,243 $ 12,349 $ 102,238,382 $ ( 104,382,549 ) $ ( 2,131,818 ) Stock-based compensation expense — — 2,478,179 — 2,478,179 Issuance of common stock and warrants, net of issuance costs of $ 6,434,447 15,713,664 15,714 83,540,849 — 83,556,563 Net loss — — — ( 5,019,531 ) ( 5,019,531 ) Balance, March 31, 2024 28,062,907 $ 28,063 $ 188,257,410 $ ( 109,402,080 ) $ 78,883,393 Stock-based compensation expense 5,000 5 1,828,469 — 1,828,474 Net loss — — — ( 7,902,816 ) ( 7,902,816 ) Balance, June 30, 2024 28,067,907 $ 28,068 $ 190,085,879 $ ( 117,304,896 ) $ 72,809,051 Common Stock Additional Paid-In Capital Accumulated Deficit Total Stockholders’ (Deficit) Shares Amounts Balance, January 1, 2023 3,654,119 $ 3,654 $ 63,726,057 $ ( 66,737,765 ) $ ( 3,008,054 ) Stock-based compensation expense — — 131,579 — 131,579 Exercise of pre-funded warrants 66,566 66 282,839 — 282,905 Conversion of multi-draw credit agreement - related party and accrued interest 165,517 166 2,980,355 — 2,980,521 Net loss — — — ( 5,167,520 ) ( 5,167,520 ) Balance, March 31, 2023 3,886,202 $ 3,886 $ 67,120,830 $ ( 71,905,285 ) $ ( 4,780,569 ) Stock-based compensation expense — — 102,871 — 102,871 Net loss — — — ( 3,111,500 ) ( 3,111,500 ) Balance, June 30, 2023 3,886,202 $ 3,886 $ 67,223,701 $ ( 75,016,785 ) $ ( 7,789,198 ) 8 See accompanying notes to the unaudited condensed consolidated financial statements. 9 SKYE BIOSCIENCE, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Organization, Basis of Presentation and Significant Accounting Policies Nature of Operations Skye Bioscience, Inc. (the “Company” or “Skye”) was incorporated in Nevada on March 16, 2011. The Company is a clinical stage biopharmaceutical company developing next-generation molecules that modulate G protein-coupled receptors to treat obesity and metabolic diseases. As of June 30, 2024, the Company has devoted substantially all its efforts to securing its product pipeline, carrying out its own research and development, preparing for and conducting clinical trials, 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. Basis of Presentation The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Interim financial results are not necessarily indicative of results anticipated for the full year, or any future periods. The Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, from which the prior year balance sheet information herein was derived. Certain reclassifications have been made to the amounts in prior periods to conform to the current period’s presentation, primarily the separate classification of prepaid expenses and other current assets on the Company's condensed balance sheet, and condensed statement of cash flows and change in fair value of derivative liability and interest expense on the condensed statement of operations. Such reclassifications did not have a material impact on the Unaudited Condensed Consolidated Financial Statements. During the six months ended June 30, 2024 , there were no changes to the Company's significant accounting policies as described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Pronouncements Implemented In November 2023, the Financial Account Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures . The amendments in this ASU require disclosures, on an annual and interim basis, of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), as well as the aggregate amount of other segment items included in the reported measure of segment profit or loss. This ASU requires that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. This ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The amendments in this ASU should be applied retrospectively to all prior periods presented in the financial statements. The Company early adopted the ASU as of January 1, 2024, and determined that its adoption did not have a material impact on the Company’s consolidated financial statements and related disclosures. As defined in the ASU, operating segments are components of an enterprise about which discrete financial information is available that is evaluated regularly by the CODM in making decisions on how to allocate resources and assess performance for the organization. The Company operates and manages its business as one reportable and operating segment — pharmaceutical development. The Company’s CODM is the Chief Executive Officer. The Company’s CODM reviews consolidated operating results to make decisions about allocating resources and assessing performance for the entire Company. 10 In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) . The new standard reduces the number of accounting models for convertible debt instruments, amends the accounting for certain contracts in an entity’s own equity, and modifies how certain convertible instruments and contracts that may be settled in cash or shares impact the calculation of diluted earnings per share. Specifically, the guidance removes certain accounting models that separate the embedded conversion features from the host contract for convertible instruments and requires the use of the if-converted method to calculate diluted earnings per share. This standard was effective for fiscal years beginning after December 15, 2023 and interim periods within those fiscal years. The Company adopted this standard as of January 1, 2024 and the adoption of this standard did not have an impact on the Company's Unaudited Condensed Consolidated Financial Statements or related disclosures. Recent Accounting Pronouncements Not Yet Adopted In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures. This ASU requires greater disaggregation of information about a reporting entity's effective tax rate reconciliation as well as information on income taxes paid. This ASU applies to all entities subject to income taxes and is intended to help investors better understand an entity’s exposure to potential changes in jurisdictional tax legislation and assess income tax information that affects cash flow forecasts and capital allocation decisions. This ASU is effective for annual periods beginning after December 15, 2024, with early adoption permitted. This ASU should be applied on a prospective basis although retrospective application is permitted. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements and related disclosures. 2. Asset Dispositions Sale of real estate The wind down of Emerald Health Therapeutics, Inc. ("EHT's") operations included the disposition of real estate held by AVI (the "AVI building"). At the time of the Company’s acquisition of EHT on November 10, 2022 (the “EHT Acquisition”) , none of the purchase consideration was allocated to the fair value of the AVI building. As a result of the sale of the AVI building, for the six months ended June 30, 2024, the Company recorded a gain of $ 1,145,141 in other (income) expense, net of sales costs. Divestiture of VDL On February 9, 2023, the Company sold Verdélite Sciences, Inc. ("VDL"). For the six months ended June 30, 2023, the Company has recorded a loss on sale of asset of $ 307,086 in other (income) expense based on the difference between the carrying amount of the assets sold and the net cash proceeds. See Note 10. 11 3. Prepaid Expenses, Other Current Assets and Liabilities Prepaid expenses consist of the following: As of June 30, 2024 As of December 31, 2023 Clinical expenses $ 74,866 $ 61,352 Financial advisory service agreement 568,340 — Other prepaid expenses 452,833 132,907 $ 1,096,039 $ 194,259 Other current assets consist of the following: As of June 30, 2024 As of December 31, 2023 AusIndustry incentive $ 548,646 $ 540,604 Vendor deposits 2,158,702 403,439 Excise tax bonds — 125,784 Other tax receivables 20 32,458 Other current assets — 17,644 $ 2,707,368 $ 1,119,929 Other current liabilities consist of the following: As of June 30, 2024 As of December 31, 2023 Research and development costs $ 750,049 $ 467,784 Legal fees 233,282 258,213 EHT Acquisition related liabilities — 180,897 Travel and entertainment expenses 25,479 — Consulting Fees 23,756 — Professional and consulting fees 141,100 69,468 Other accrued liabilities 11,129 22,190 $ 1,184,795 $ 998,552 12 4. Warrants There are significant judgements and estimates inherent in the determination of the fair value of the Company’s warrants. These judgements and estimates include assumptions regarding the Company’s future operating performance and the determination of the appropriate valuation methods. Warrants Warrants vested and outstanding as of June 30, 2024 are summarized as follows: Source Exercise Price Weighted Average Remaining Contractual Term (Years) Number of Warrants Outstanding 2015 Common Stock Warrants $ 1,250.00 0.82 400 2016 Common Stock Warrants to Service Providers 287.50 2.34 160 2019 Common Stock Warrants 87.50 0.39 32,000 2020 Common Stock Warrants to Placement Agent 20.00 1.08 32,668 2021 Inducement Warrants 37.50 2.07 84,667 2021 Inducement Warrants to Placement Agent 47.00 2.07 5,927 2021 Common Stock Warrants 22.50 2.25 311,113 2021 Common Stock Warrants to Placement Agent 27.50 2.25 21,778 November 2019 EHT Common Stock Warrants 72.25 0.42 34,213 December 2019 EHT Common Stock Warrants 37.25 0.50 3,783 February 2020 EHT Common Stock Warrants 37.25 0.62 80,694 August 2023 Convertible Note Common Stock Warrants 5.16 9.14 340,000 August 2023 PIPE Financing Common Stock Warrants 5.16 9.14 2,325,537 January 2024 Pre-Funded Warrants Common Stock 0.001 Indefinite 9,978,739 Total warrants outstanding as of June 30, 2024 13,251,679 As of June 30, 2024, all of the Company's warrants are fully vested . January 2024 Pre-Funded Warrants In connection with the January 2024 PIPE Financing (as defined below), the Company issued the Pre-Funded Warrants (as defined below) (See Note 6). The Pre-Funded Warrants have an exercise price of $ 0.001 per share, and were exercisable immediately upon issuance until exercised in full. The gross proceeds from the issuance of these Pre-Funded Warrants was $ 22,991,015 . The Company determined that the Pre-Funded Warrants are freestanding instruments that do not meet the definition of a liability or derivative. The Pre-Funded Warrants are indexed to the Company’s common stock and meets all other conditions for equity classification. Accordingly, the Pre-Funded Warrants are classified as equity and are accounted for as a component of additional paid-in capital at the time issued. The Company also determined that the Pre-Funded Warrants should be included in the determination of basic and diluted earnings per share. ` 5. Debt The Company’s convertible debt consists of the following: As of June 30, 2024 As of December 31, 2023 Total principal value of convertible note - related party, net of discount $ 5,000,000 $ 5,000,000 Unamortized debt discount ( 136,616 ) ( 610,749 ) Unamortized debt issuance costs ( 3,859 ) ( 17,253 ) Carrying value of total convertible debt - related party $ 4,859,525 $ 4,371,998 13 Convertible Note - Related Party On August 15, 2023, the Company entered into a Secured Note and Warrant Purchase Agreement with MFDI, LLC (“MFDI”), pursuant to which the Company issued to MFDI a $ 5,000,000 secured convertible promissory note (the "Convertible Note") and a warrant to purchase 340,000 shares of common stock on August 18, 2023 (the "Convertible Note Financing") (See Note 4). The Convertible Note bears interest at a rate of 10 % per annum and matures on August 18, 2024, unless earlier repurchased or converted. MFDI can elect to convert the Convertible Note at any time and the conversion price is fixed at $ 5.16 . Accrued interest is payable quarterly within 30 days of the last day of each calendar quarter. The Company may prepay the principal or interest outstanding under the Convertible Note at any time without penalty. The debt discounts related to the warrants, and debt issuance costs, are being amortized over the term of the Convertible Note using the effective interest rate method. Amortization of the debt discount is recognized as non-cash interest expense in Other (income) expense within the Consolidated Statements of Operations. As of June 30, 2024, the fair value of the Convertible Note approximates its intrinsic value which is equal to $ 2,761,474 . The intrinsic value of the Convertible Note was calculated as the excess fair value of the underlying conversion shares over the principal value of the Convertible Note. The Convertible Note is classified as Level 2 of the fair value hierarchy model based on market prices that can be corroborated with observable market data for the Company's common stock. For the three and six months ended June 30, 2024, the effective interest rate on the Convertible Note was 31.39 %. Subsequent to June 30, 2024, the conversion option on the Convertible Note was exercised (See Note 10). Interest Expense The Company’s interest expense consists of the following: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Related party interest expense – stated rate $ 124,658 $ — $ 249,315 $ 15,952 Legal judgment interest expense 75,189 182,171 150,146 182,171 Other interest expense — 4,258 — 6,705 Non-cash interest expense: Amortization of debt discount 243,331 — 474,133 — Amortization of transaction costs 6,874 — 13,394 — $ 450,052 $ 186,429 $ 886,988 $ 204,828 6. Stockholders’ Equity and Capitalization PIPE Financings January 2024 PIPE Financing On January 29, 2024 , the Company entered into a Securities Purchase Agreement with certain institutional investors, pursuant to which on January 31, 2024 , the Company issued an aggregate of 11,713,664 shares of common stock and 9,978,739 pre-funded warrants (the "Pre-Funded Warrants") to purchase up to 9,978,739 shares of common stock (the "January 2024 PIPE Financing") for an aggregate purchase price of $ 49,991,010 . The January 2024 PIPE Financing was priced at $ 2.31 per common share and $ 2.30 per Pre-Funded Warrant based on the 5-day average share price preceding January 29, 2024. The Ore-Funded Warrants are exercisable at any time for an exercise price of $ 0.001 . In connection with the January 2024 PIPE Financing, the Company incurred $ 3,823,752 in direct equity issuance costs for net proceeds of $ 46,167,258 . March 2024 PIPE Financing On March 11, 2024, the Company entered into a Securities Purchase Agreement with certain institutional investors , pursuant to which on March 13, 2024, the Company issued an aggregate of 4,000,000 shares of common stock (the "March 2024 PIPE Financing") for an aggregate purchase price of $ 40,000,000 . The March 2024 PIPE Financing was priced at $ 10.00 per common share. In connection with the March 2024 PIPE Financing, the Company incurred $ 2,610,695 in direct equity issuance costs for net proceeds of approximately $ 37,389,305 . 14 7. Stock-Based Compensation Stock Incentive Plan On October 31, 2014, the Board of Directors ("Board") approved the Company’s 2014 Omnibus Incentive Plan. On June 14, 2022, the Board approved the 2014 Amended and Restated Omnibus Incentive Plan (the “2014 Amended and Restated Plan”) which replaced the 2014 Omnibus Incentive Plan in its entirety. On September 29, 2023, the Board and holders of the voting power of the outstanding capital stock of the Company adopted and approved Amendment No. 1 to the 2014 Amended and Restated Plan. Amendment No. 1 to the 2014 Amended and the Restated Plan became effective on November 6, 2023. As of June 30, 2024, 2,464,345 shares were authorized for the issuance under the 2014 Amended and Restated Plan. The Company has reserved shares for issuance under 2014 Amended and Restated Plan upon share option exercise. As of June 30, 2024, the Company had 137,833 shares available for future grant under the 2014 Amended and Restated Plan. Stock Options The following is a summary of option activities under the Company’s 2014 Amended and Restated Plan for the six months ended June 30, 2024: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value* Outstanding, December 31, 2023 498,298 $ 8.96 7.24 $ 20,441 Granted 768,100 14.40 Cancelled ( 2,926 ) 400.00 Forfeited ( 72,873 ) 8.32 Outstanding, June 30, 2024 1,190,599 $ 11.54 9.14 $ 1,532,218 Exercisable, June 30, 2024 345,887 $ 11.08 8.23 $ 591,698 *The aggregate intrinsic value is the sum of the amounts by which the quoted market price of the Company’s stock exceeded the exercise price of the stock options at June 30, 2024 for those stock options for which the quoted market price was in excess of the exercise price ("in-the-money options"). The weighted-average grant-date fair value of stock options granted during the six months ended June 30, 2024, was $ 11.42 . The fair value of the Company's stock option grants were estimated on the date of grant using the Black-Scholes option-pricing model under the following assumptions: Six Months Ended June 30, 2024 Dividend yield 0.00 % Volatility factor 99.58 % - 99.96 % Risk-free interest rate 4.26 % - 4.48 % Expected term (years) 5.27 - 6.08 15 Restricted Stock Units On February 29, 2024, the Company granted restricted stock units ("RSUs") to its executive management team and to certain members of the Board with market-based vesting conditions. The RSUs are eligible to vest subject to the achievement and attainment of certain market capitalization target goals and share price targets (market-based vesting conditions). The Company used the Monte Carlo Simulation model to evaluate the derived service period and fair value of awards with market and performance conditions, including assumptions of historical volatility and risk-free interest rate commensurate with the vesting term. The fair value of the Company's market-based RSUs were estimated on the date of grant under the following assumptions: Six Months Ended June 30, 2024 Dividend yield 0.00 % Volatility factor 93.71 % Risk-free interest rate 4.16 % Derived service periods (years) 1.27 - 2.48 The following is a summary of RSU activity during the period ended June 30, 2024 : Number of Shares Weighted Average Grant Date Fair Value Unvested, December 31, 2023 847,777 $ 3.66 Granted 275,000 14.21 Unvested, June 30, 2024 1,122,777 $ 6.24 Common Stock Issued for Services Additionally, during the three months ended June 30, 2024, the Company issued 5,000 shares of common stock to a service provider as compensation for services provided. Such shares were issued in a private placement outside of the 2014 Amended and Restated Plan. Stock-Based Compensation Expense The Company recognizes stock-based compensation expense using the straight-line method over the requisite service period or derived service period. The Company recognized stock-based compensation expense for the stock options and the RSUs discussed above, in its Unaudited Condensed Consolidated Statements of Operations as follows: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Research and development $ 303,081 $ 12,533 $ 695,719 $ 57,001 General and administrative 1,525,388 90,338 3,610,934 177,449 $ 1,828,469 $ 102,871 $ 4,306,653 $ 234,450 During the three and six months ended June 30, 2024, the first three market based vesting conditions of the RSUs granted in August 2023 were met. The total amount of unrecognized compensation cost was $ 11,848,634 as of June 30, 2024. This amount will be recognized over a weighted average period of 2.92 years . 16 8. Loss Per Share of Common Stock The following tables are a reconciliation of the numerators and denominators used in the calculation of basic and diluted net loss per share computations: Three Months Ended June 30, (Unaudited) Six Months Ended June 30, (Unaudited) 2024 2023 2024 2023 Basic EPS and diluted EPS: Loss (Numerator) Net loss $ ( 7,902,816 ) $ ( 3,111,500 ) $ ( 12,922,347 ) $ ( 8,279,020 ) Shares (Denominator) Weighted average common shares outstanding (1) 38,669,330 3,886,198 33,334,616 3,827,216 Per-Share Amount $ ( 0.20 ) $ ( 0.80 ) $ ( 0.39 ) $ ( 2.16 ) The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been anti-dilutive: Three Months Ended June 30, (Unaudited) Six Months Ended June 30, (Unaudited) 2024 2023 (1) 2024 2023 (1) Stock options 1,190,599 151,903 1,190,599 151,903 Warrants 3,272,940 615,392 3,272,940 615,392 Unvested restricted stock units 503,446 10,667 503,446 10,667 Convertible Debt 968,973 Convertible Debt — 968,973 — ___________________ (1) Previously reported o utstanding shares of common stock equivalents were adjusted for the effects of the reverse stock split at a ratio of one-for-two hundred and fifty (1-for-250). The reverse stock split was transacted on September 6, 2023. 9. Contingencies General Litigation and Disputes From time to time, in the normal course of operations, the Company may be a party to litigation and other dispute matters and claims. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable outcome to any legal matter, if material, could have a materially adverse effect on the Company’s operations or financial position, liquidity or results of operations. Wendy Cunning vs Skye Bioscience, Inc. The Company is a party to a legal proceeding with a former employee alleging, among other things, wrongful termination, violation of whistleblower protections under the Sarbanes-Oxley Act of 2002, and retaliation under California law against the Company relating to certain actions and events that occurred with the Company's former management during the employee's employment term from March 2018 to July 2019. The case, entitled Wendy Cunning vs Skye Bioscience, Inc. , was filed in U.S. District Court (the "District Court") for the Central District of California (the “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. On February 13, 2023, the Company received the final judgment on the special verdict (the "Final Judgment") from the District Court. On August 2, 2023, the District Court ruled on the plaintiff's motion for attorney fees and awarded the plaintiff $ 1,200,008 . Based on this order, the Company reduced the aggregate estimate for the legal contingency by $ 151,842 , the difference between the attorney fees awarded by the District Court and the Company's previous estimate. On August 17, 2023, the Company obtained a stay on enforcement of the judgment in the Cunning Lawsuit by posting an appeal bond in the amount of $ 9,080,202 . 17 On October 19, 2023, the Company received the final orders from the District Court denying the post-trial motions that the Company filed with the District Court in March 2023 seeking judgment as a matter of law, a new trial, and/or a reduction of the judgment. Additionally, in March of 2023, the Company appealed the judgment in the Cunning Lawsuit to the Ninth District Court of Appeals (the "Ninth Circuit"). Oral argument before the Ninth Circuit is scheduled in the third quarter of 2024. The Company believes that this case was incorrectly decided as to liability, the amount of compensatory damages, and the appropriateness and amount of punitive damages. While the Company is challenging the verdict in the Ninth Circuit and is pursuing reimbursement under its existing insurance policies, there is no guarantee that the Company will be successful in these efforts. Given the jury verdict, the Company has determined that a loss is probable and accordingly has recorded a legal contingency expense and a current balance sheet liability for the total amount of the jury verdict. The Company has recorded an aggregate estimate for the legal contingency of $ 6,053,468 plus accrued interest of $ 384,896 at an annual interest rate of 4.9 % on the judgment and 5.38 % on the legal fees, which is determined by the Superior Court of California. Depending on the outcome of the appeal, it is reasonably possible that the legal contingency booked could materially change after the issuance of these financials. For the three and six months ended June 30, 2024, the Company recorded interest expense of $ 75,189 and $ 150,146 respectively, which is included in Legal judgment interest expense in Other (income) expense in the Unaudited Condensed Consolidated Statements of Operations (See Note 5). Skye Bioscience, Inc. vs Partner Re Ireland Insurance In February 2023, the Company brought a suit against the Company's D&O insurance carrier, Partner Re Ireland Insurance DAC ("Partner Re"), bringing claims for (a) breach of contract, (2) tortious breach of the implied covenant of good faith and fair dealing and (3) declaratory relief that Partner Re is obligated to reimburse the Company for the defense fees and costs incurred in defense of the Cunning Lawsuit and must indemnify the Company for any settlement or judgment in the Cunning Lawsuit. The Company's allegations arise out of Partner Re's refusal to reimburse the Company for costs incurred by the Company in defending the Cunning Lawsuit. The case, entitled Skye Bioscience, Inc., v. Partner Re Ireland Insurance DAC , was filed in the United Stated District Court for the Central District of California. On April 17, 2023, Partner Re filed a motion to dismiss the Company's complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). On June 20, 2023, the court issued a ruling in favor of the Company and denied Partner Re's motion to dismiss the Company's lawsuit. In April 2024, the Company filed a motion for judgment on the pleadings. In June of 2024, the court granted in part and denied in part the Company's motion for judgment on the pleadings. The court granted the Company's motion for judgment on the pleadings with respect to Partner Re's affirmative defense related to whether the Cunning Lawsuit constituted a “Securities Claim” as defined in the Partner Re policy, rejecting what had been Partner Re's primary basis for denying coverage. The Company is pursuing up to $ 5,000,000 in coverage less the deductible to cover legal expenses incurred and to be incurred pending the final verdict or settlement of the Cunning Lawsuit. 10. Subsequent Events 2024 Inducement Equity Incentive Plan On July 2, 2024, the Board of Directors of the Company adopted the Skye Bioscience, Inc. 2024 Inducement Equity Incentive Plan (the "Inducement Plan"). The Inducement Plan was adopted in order to grant share-based awards to newly hired employees as an inducement to join the Company. The terms of the Inducement Plan are substantially similar to the terms of the Company’s 2014 Amended and Restated Plan with the exception that awards may only be made to an employee who has not previously been an employee or member of the Board of Directors of the Company if the award is in connection with commencement of employment . The Company has reserved 600,000 shares of the Company’s common stock for issuance pursuant to awards granted under the Inducement Plan. VDL Transaction, Release and Discharge Agreement On July 17, 2024, the Company reached a transaction, release and discharge agreement with the purchaser of VDL. Under the transaction, release and discharge agreement, the purchase price of VDL was adjusted in exchange for a full release of any future claims. As part of the agreement, the parties agreed to an installment payment schedule for the remaining aggregate balance of the purchase price of $ 2,047,080 through December 2027. The note receivable bears interest at 8 %. Upon signing the transaction, release and discharge agreement the Company received the first installment payment of $ 73,110 . Stock Option Grants Subsequent to June 30, 2024 , the Company granted an aggregate of 153,000 common stock options to consultants, employees and directors under the 2014 Amended and Restated Plan. Subsequent to June 30, 2024 , the Company granted 60,000 common stock options and 15,000 RSUs under Inducement Plan. 18 Prefunded Warrant Exercise Subsequent to June 30, 2024, 1,301,573 pre-funded warrants with an intrinsic value of $ 10,424,294 were cashless exercise in exchange for 1,301,410 shares of common stock. Settlement of Convertible Note On August 8, 2024, the holder of the Convertible Note exercised their conversion option in exchange for 968,973 shares of the Company's common stock. Accrued interest will be paid to the holder in cash through the settlement date. 19