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 and six months ended June 30, 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 trial for nimacimab and our estimates regarding the market opportunity for 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 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; • our competitive position and the development of competing therapies that are or may become available; • regulatory developments in the United States and foreign countries; and • current pending litigation matters, including the Cunning Lawsuit. 20 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 on Form 10-Q, 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 focused on unlocking new therapeutic pathways for metabolic health through the development of next-generation molecules that modulate G-protein coupled receptors ("GPCRs"). GPCRs regulate diverse physiological and pathological processes, particularly those that maintain metabolic homeostasis. Therapeutics that target these GPCR-associated pathways may represent novel approaches to address metabolic disorders. Our product candidate, nimacimab, is a peripherally-restricted negative allosteric modulating antibody specific for the human CB1 receptor (CB1), administered as a subcutaneous injectable initially for the treatment of obesity. Subsequent to June 30, 2024, we finalized our Phase 2 clinical trial protocol for nimacimab, CBeyond TM , updated our Investigational New Drug file with the FDA and completed the site selection process. The CBeyond TM clinical trial will include 120 patients, 18 planned clinical trial sites and an exploratory combination arm with a GLP-1 agonist to assess the difference in weight loss, differences in body composition and changes in sleep quality. We expect our clinical trial to begin screening in Q3 2024 and expect to provide interim and topline data in the second and fourth quarters of 2025, respectively. This study’s primary endpoint is to evaluate weight loss using nimacimab compared to placebo. Secondary endpoints include evaluations of safety and tolerability, neuropsychiatric and cognitive evaluation, change in body composition by Dual-Energy X-ray Absorptiometry (DEXA), and changes in key metabolic biomarkers such as triglycerides, insulin and leptin sensitivity. Given the distinct mechanism and beneficial attributes of nimacimab as a peripheral CB1 inhibitor, within the large and heterogeneous obesity landscape we see significant opportunity for nimacimab to potentially complement GLP-1 agonists and other anti-obesity drug mechanisms of action as well as to have a potential role as a monotherapy. In June 2024, we completed our Phase 2a double-masked randomized, placebo-controlled trial of SBI-100 Ophthalmic Emulsion (“SBI-100 OE”) in 56 patients with elevated intraocular pressure ("IOP") diagnosed with primary open-angle glaucoma or ocular hypertension. The primary endpoint evaluated the change in diurnal IOP in the treated arm vs. placebo over 2 weeks. The study did not achieve a statistically significant improvement in IOP over placebo. As a result, we eliminated our ocular program and strategically redirected our efforts and capital resources to our metabolic program. We have also terminated our license agreement with the University of Mississippi and other vendor contracts related to the manufacture, development, and sublicense of SBI-100. In January 2024 and March 2024, we completed two private placement equity transactions (the "January and March PIPE Financings") with institutional accredited investors, in which we raised combined net aggregate proceeds of $83,556,563. The net capital raised from the January and March PIPE Financings along with the reallocation of funds from the elimination of our glaucoma program will allow us to fund our clinical trial for obesity through top-line Phase 2 data and provide us with the ability to expand upon our metabolic program. 21 On May 10, 2024, we entered into an Equity Distribution Agreement (the “ATM Agreement”) with Piper Sandler & Co, as the sales agent (the “Sales Agent”), under which we may, from time to time, sell up to $100,000,000 of shares of our common stock through the Sales Agent (the “ATM Offering”). We are not obligated to, and we cannot provide any assurances that we will continue to, make any sales of the shares under the ATM Agreement. We will pay the Sales Agent a commission for their services in acting as agent in the sale of common stock in an amount up to 3% of the gross sales price per share sold. During the three and six months ended June 30, 2024 , we did not issue any shares under the ATM Offering. In April 2024, Skye uplisted to the NASDAQ Global Market® stock exchange from the OTCQB and in August of 2024 the Company's Convertible Note was settled for shares of the Company's common stock. 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. Financial Overview Revenues To date, we have not generated any revenue. We do not expect to receive any revenue from our drug candidate or any future drug candidates that we develop unless and until we obtain regulatory approval for, and commercialize, our drug candidate or future drug candidates or generate revenue from collaborative agreements with third parties. Research and Development Expenses During the three months ended June 30, 2024, we incurred $4,078,751 in research and development expenses primarily related to residual costs from our legacy Phase 2a SBI-100 OE clinical trial and costs from the preparation of the launch of our Phase 2 clinical trial for obesity. During the three months ended June 30, 2023, we incurred $1,788,434 in research and development expense primarily related to our efforts in conducting the Phase 1 SBI-100 OE clinical trial. During the six months ended June 30, 2024, we incurred $6,025,201 in research and development expenses primarily related to our efforts in conducting the Phase 2a SBI-100 OE clinical trial and costs from the preparation of the launch of our Phase 2 clinical trial for obesity. During the six months ended June 30, 2023, we incurred $2,973,314 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 candidate or future drug candidates, including, but not limited to: • 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 preclinical, nonclinical, and clinical studies. Preclinical and nonclinical activities include early discovery efforts with novel molecules, 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 our current and future 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. 22 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 and our uplisting to Nasdaq, including expenses related to compliance with the rules and regulations of the SEC and Nasdaq, 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 (see Note 2 to the accompanying Unaudited Condensed Consolidated Financial Statements), 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2023 . Recently Issued and Adopted Accounting Pronouncements 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 For the three months ended June 30, 2024 and 2023 Research and Development Expenses Below is a summary of our research and development expenses during the three months ended June 30, 2024 and to the same period in 2023: Three Months Ended June 30, 2024 2023 $ Change 2024 vs. 2023 % Change 2024 vs. 2023 Research and development expenses $ 4,078,751 $ 1,788,434 $ 2,290,317 128 % Research and development expenses for the three months ended June 30, 2024 increased by $2,290,317 as compared to the same period in 2023. The net increase in research and development expenses was primarily due to an increase of $421,263 in research and development salaries and equity based compensation, a net increase of $1,489,843 in contracted clinical costs associated with the completion of our Phase 2a glaucoma clinical trial and the preparation for our Phase 2 clinical trial for obesity. In connection with the discontinuation of our clinical trials for SBI-100 OE, we incurred contract cancellation fees and other general expenses of $269,189. In addition, there was an increase in consulting fees of $148,882 related to our clinical trial for obesity, which was offset by a decrease in license fees of $73,087 from the elimination of the SBI-200 license agreement with the University of Mississippi compared to the prior year. 23 General and Administrative Expenses Below is a summary of our general and administrative expenses during the three months ended June 30, 2024 and to the same period in 2023: Three Months Ended June 30, 2024 2023 $ Change 2024 vs. 2023 % Change 2024 vs. 2023 General and administrative expenses $ 4,326,820 $ 1,206,405 $ 3,120,415 259 % General and administrative expenses for the three months ended June 30, 2024 increased by $3,120,415 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 $1,520,647 from the recognition of stock-based compensation expense. During the three months ended June 30, 2024, professional fees increased by $945,873 due to services provided under a financial advisory agreement, professional services related to the registration of the resale of shares issued in the January and March 2024 PIPE Financings shares and general corporate legal fees associated with our uplisting to Nasdaq, the filing of our shelf registration statement and the entry into our ATM Agreement. Other increases included insurance and other general business expenses of $60,755 and $444,713, respectively. The increases in insurance and general business costs related to increased liability coverage, the initial listing fee paid to Nasdaq and regulatory agency filing fees. Other (Income) Expense Below is a summary of our other (income) expense for the three months ended June 30, 2024 and to the same period in 2023: Three Months Ended June 30, 2024 2023 $ Change 2024 vs. 2023 % Change 2024 vs. 2023 Interest expense $ 450,052 $ 186,429 $ 263,623 141 % Interest income (961,237) (8,598) (952,639) 11080 % Wind-down costs — 87,072 (87,072) (100) % Other expense $ 359 $ — 359 100 % Total other (income) expense $ (510,826) $ 264,903 $ (775,729) (293) % For the three months ended June 30, 2024, we had net other income of $510,826 related primarily to the increase in interest income of $952,639 resulting from interest payable on our cash and cash equivalents and restricted cash on deposit with financial institutions, offset by an increase of $263,623 related party interest expense from the Convertible Note (as defined in Note 5 to the accompanying Unaudited Condensed Consolidated Financial Statements). In addition, during the three months ended June 30, 2023, we recognized wind down costs of $87,072 from the EHT Acquisition . For the six months ended June 30, 2024 and 2023 Research and Development Expenses Below is a summary of our research and development expenses during the six months ended June 30, 2024 and to the same period in 2023: Six Months Ended June 30, 2024 2023 $ Change 2024 vs. 2023 % Change 2024 vs. 2023 Research and development expenses $ 6,025,201 $ 2,973,314 $ 3,051,887 103 % Research and development expenses for the six months ended June 30, 2024 increased by $3,051,887 as compared to the same period in 2023. The net increase in research and development expenses was primarily due to an increase of $800,780 in research and development salaries from increased headcount and equity based compensation, a net increase of $1,835,309 in contracted clinical costs associated with clinical trial expenses from the completion of our Phase 2a clinical trial for glaucoma and the preparation for our Phase 2 clinical trial for obesity. 24 In connection with the discontinuation of our clinical trials for SBI-100 OE, we incurred contract cancellation fees and other general expenses of $270,638. In addition, there was an increase in consulting fees of $191,095 related to our Phase 2 clinical trial for obesity, which was offset by a decrease in license fees of $70,248 from the elimination of the SBI-200 license agreement with the University of Mississippi in the prior year. General and Administrative Expenses Below is a summary of our general and administrative expenses during the six months ended June 30, 2024 and to the same period in 2023: Six Months Ended June 30, 2024 2023 $ Change 2024 vs. 2023 % Change 2024 vs. 2023 General and administrative expenses $ 8,532,620 $ 3,121,683 $ 5,410,937 173 % General and administrative expenses for the six months ended June 30, 2024 increased by $5,410,937 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 $3,573,816 from increased headcount and the recognition of stock based compensation expense due to the achievement of certain performance based milestones related to RSUs granted to members of management and members of the board of directors of the Company. During the six months ended June 30, 2024, professional fees increased by $974,077 due to services provided under a financial advisory agreement, professional services related to the registration of the resale of shares issued in the January and March PIPE Financings and general corporate legal fees associated with our uplisting to Nasdaq, the filing of our shelf registration statement, regulatory agency filing fees, legal fees related to nimacimab patent prosecution, increased tax fees due to increased complexity and the entry into the ATM Agreement. Other increases included board fees, other general business expenses, consulting, insurance and travel of $62,473, $534,914, $113,637, $112,505 and $96,681, respectively. Other (Income) Expense Below is a summary of our other (income) expense for the six months ended June 30, 2024 and to the same period in 2023: Six Months Ended June 30, 2024 2023 $ Change 2024 vs. 2023 % Change 2024 vs. 2023 Interest expense $ 886,988 $ 204,828 $ 682,160 333 % Interest income (1,388,791) (33,112) (1,355,679) 4094 % (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 — 470,181 (470,181) (100) % Other expense (income) 1,399 (3) 1,402 100 % Total other (income) expense $ (1,645,545) $ 2,332,265 $ (3,977,810) (171) % For the six months ended June 30, 2024, we had net other income of $1,645,545 related primarily to the gain on the sale of the AVI building of $1,145,141, an increase in interest income of $1,355,679, offset by an increase of $682,160 in 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 $470,181 from the EHT Acquisition. 25 Liquidity and Capital Resources Liquidity We have incurred operating losses and negative cash flows from operations since our inception, and as of June 30, 2024, we had working capital of $72,681,890, an accumulated deficit of $117,304,896, and stockholders’ equity of $72,809,051. We had unrestricted cash and cash equivalents in the amount of $74,120,854 as of June 30, 2024, as compared to $1,256,453 as of December 31, 2023. For the six months ended June 30, 2024 and 2023, the Company incurred losses from operations of $14,557,821 and $5,943,155, respectively. For the six months ended June 30, 2024 and 2023, the Company incurred net losses of $12,922,347 and $8,279,020, respectively. In January 2024 and March 2024, we completed the January and March PIPE Financings, in which we raised combined net aggregate proceeds of $83,556,563. We expect the capital from the January and March PIPE Financings to fund our Phase 2 clinical trial for obesity through top line Phase 2 data in late 2025 and the potential expansion of our metabolic program. In May 2024, we entered into the ATM Agreement under which the Company may, sell up to $100,000,000 of shares of common stock through the Sales Agent. The Company has not sold any shares under the ATM Agreement as of the date hereof and is not obligated to, and cannot provide any assurances that the Company will continue to, make any sales of the shares under the ATM Agreement. Subsequent to June 30, 2024, the holder of the Convertible Note exercised their conversion option and converted the principal balance of the Convertible Note into 968,973 shares of our common stock. The Company’s Unaudited 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 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, including of our uplisting to Nasdaq; • the amount of revenue, if any, received from commercial sales of our drug candidates, should any of our drug candidates receive marketing approval; and • 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 Quarterly Report on Form 10-Q: Six Months Ended June 30, 2024 2023 Net cash used in operating activities $ (11,801,659) $ (6,052,759) Net cash provided by investing activities 1,109,497 5,530,406 Net cash provided by (used in) financing activities 83,556,563 (168,720) 26 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 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 $11,801,659 during the six months ended June 30, 2024, reflected a net loss of $12,922,347, partially offset by aggregate non-cash charges of $3,963,183 and included a $2,842,495 net change in our operating assets and liabilities. Non-cash charges included $4,306,653 for stock-based compensation expense primarily attributable to the vesting of RSUs related to the achievement of certain market based performance milestones, $487,527 in non-cash interest expense debt amortization expense, $1,145,141 gain from the sale of a real estate asset and $246,000 from the write-off of vendor deposits. The net change in our operating assets and liabilities included a $2,735,219 cash outflow from changes in our prepaid expenses and other current assets, a $30,984 net cash outflow from changes in our accrued expenses and other current liabilities and a $76,292 cash outflow from the repayment of our accounts payable. Cash used in operating activities of $6,052,759 during the six months ended June 30, 2023, reflected a net loss of $8,279,020, partially offset by aggregate non-cash charges of $1,992,843 and included a $233,418 net change in our operating assets and liabilities. Cash Flows from Investing Activities During the six months ended June 30, 2024, the Company purchased $35,644 in machinery and office equipment and recognized $1,145,141 in net proceeds from the sale of the AVI building. During the six months ended June 30, 2023, the Company purchased $1,860 in machinery office equipment. During the six months ended June 30, 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 six months ended June 30, 2024, cash provided by financing activities included $83,556,563 in proceeds received in connection with the January and March PIPE Financings, net of issuance costs. During the six months ended June 30, 2023, cash used in financing activities included a $168,720 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.