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Item 9A. Controls and Procedures

2021-03-02 compared with 2020-03-23 · 638 added, 698 removed, 847 unchanged (61% of the section changed)

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Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management, with the supervision and participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2019, based on criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework - 2013 (COSO 2013 Framework).

Our management, with the supervision and participation of our Chief Executive Officer and Interim Principal Accounting Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2020, based on criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework - 2013 (COSO 2013 Framework).

Based on their assessment, our management concluded that, as of December 31, 2020, our internal control over financial reporting was effective.

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Other Information .

Effective March 23, 2020, some members of senior management will defer 50% of their compensation from the Company until further notice of the Board.

Such deferral was approved by the Board on March 16, 2020.

The aggregate deferred compensation, together with a retention bonus of 10% of the amount being deferred, will be payable to the senior management upon the Board’s further determination of the financial conditions of the Company.

Directors, Executive Officers and Corporate Governance .

The following table sets forth certain information as of the date of this Annual Report, with respect to our directors, executive officers and significant employees.

Chief Executive Officer, Director

Douglas Cesario

Chief Financial Officer

Chief Medical Officer

Punit Dhillon

Chairman, Director

Chief Executive Officer, Chairman, Director

Richard Janney

Interim Principal Accounting Officer

Margaret Dalesandro

Biographies of Directors, Executive Officers and Significant Employees

Murphy was appointed as our Chief Executive Officer and as a director in August 2015.

Murphy was appointed as our Chief Medical Officer in October 2014, and relinquished Chief Medical Officer responsibilities when Dr.

Kim was hired in August 2019.

Murphy was the Chief Medical Officer of Nemus Sub from August 2014 to October 2014.

From 2009 to August 2014, Dr.

Murphy served as the Chief Medical Officer of Eiger Biopharmaceuticals.

From 2003 to 2006, Dr.

Murphy was Chief Medical Officer at Epiphany Biosciences.

From 2003 to 2006, Dr.

Murphy was Chief Medical Officer at Valeant Pharmaceuticals International (VRX) where his responsibilities also included oversight of Global Medical Affairs and Pharmacovigilance.

Murphy also served as Medical Director, then Vice President of Marketing and Commercial Strategy of Hepatology for InterMune, Inc.

From 2000 to 2002, Dr.

Murphy was Medical Director of North America for Antivirals/Interferons/Transplant at Hoffmann-LaRoche.

Prior to joining industry, Dr.

Murphy was Assistant Professor of Medicine at New York Medical College and was Director of the Clinical Strategies Program at St.

Vincent’s Hospital in New York City, the lead hospital of the Catholic Healthcare Network of New York.

Murphy is board-certified in internal medicine and completed his residency in internal medicine at Tufts-New England Medical Center and served as Chief Medical Resident in the Boston University program.

Murphy completed parallel fellowship tracts at Harvard Medical School, one in internal medicine/clinical Epidemiology at the Massachusetts General Hospital and the other in Medical Ethics addressing issues of distributive justice and access to care at Brigham & Women’s Hospital.

Murphy earned his MD, MPH (general public health), and MS (pharmacology) degrees from New York Medical College and is a graduate of the Harvard School of Public Health (MPH in Health Policy and Management).

He earned his MBA at the Columbia University Graduate School of Business.

In making the decision to appoint Dr.

Murphy to serve as a director, the Board considered, in addition to the criteria referred to above, his experience in the healthcare industry, current service as our Chief Executive Officer and his comprehensive knowledge of the Company, our business and operations.

Douglas Cesario .

Cesario was appointed as our Chief Financial Officer in May 2018.

Prior to his appointment, Mr.

Cesario served as Chief Financial Officer, Orange County Service Area, of Kaiser Foundation Hospitals & Health Plan since April 2016, and prior to that as Director of Finance and as a Senior Management Consultant from November 2013.

From 2007 to 2012, Mr.

Cesario was the founder of a real estate investment and advisory company.

Cesario previously served in private equity, investment banking and commercial real estate roles from 1997 through 2006.

He earned his MBA from the UCLA Anderson School of Management.

Based on his cumulative and diverse financial background, our Board believes Mr.

Cesario has the requisite knowledge and expertise to serve as our Chief Financial Officer.

Kim was appointed Chief Medical Officer in August 2019.

He is a physician biotechnology executive with specialty training in endocrinology/metabolism spanning approximately 20 years of drug/product development and corporate strategy experience in the biotech and medical technology industries.

Kim is an independent Board Member of Inversago Pharma.

Kim previously served as Chief Medical Officer of Emerald Health Sciences, Inc.

Prior to that, he was Chief Medical Officer at Zafgen, Inc.

for over seven years where he oversaw all aspects of clinical and medical affairs in the field of diabetes, obesity, and rare metabolic/genetic disorders.

Prior to joining Zafgen, Dr.

Kim held multiple senior-level positions at Orexigen Therapeutics (Sr.

VP of Medical and Clinical Affairs), EnteroMedics (Chief Medical Officer) and Amylin Pharmaceuticals (Exec Director of Corporate Strategy).

He holds an MD from the University of Health Sciences, The Chicago Medical School, an MBA from UCSD Rady School of Management and a B.S.

in biology from the University of California at Los Angeles.

His endocrinology/metabolism specialty fellowship training was completed at UCSD School of Medicine.

Punit Dhillon.

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Dhillon’s experience in the biotechnology and pharmaceutical industry, and his experience with publicly traded companies were the primary qualifications that the Board considered in appointing him as a director of the Company.

Heppell was the founder, CEO and director of BC Advantage Life Sciences I Fund, which won the Canadian Venture Capital Deal of the Year Award in 2006 for having the highest realized return (23.4x its investment in Aspreva Pharmaceuticals) of any venture capital fund in Canada.

Heppell was the founder, CEO and director of BC Advantage Life Sciences I Fund, which won the Canadian Venture Capital Deal of the Year Award for having the highest realized return (23.4x its investment in Aspreva Pharmaceuticals) of any venture capital fund in Canada.

Heppell has a Bachelor of Science degree in Microbiology and a law degree from the University of British Columbia.

After being called to the Bar, he worked for six years with Fasken Martineau DuMoulin, during which time he was seconded to the BC Securities Commission for six months.

Heppell then became President and Chief Executive Officer of Catalyst Corporate Finance Lawyers, a boutique corporate finance law firm that focused on assisting life science and technology companies.

He is a past member of the Securities Policy Advisory Committee to the BCSC and is a Past-Chairman of the Securities Section of the Canadian Bar Association (B.C.

Heppell is currently a director of a number of public and private life science companies, including Emerald Health Sciences.

Heppell then became President and Chief Executive Officer of Catalyst Corporate Finance Lawyers, a boutique corporate finance law firm that focused on building life science and technology companies.

He is a past member of the Securities Policy Advisory Committee to the BCSC and is Past-Chairman of the Securities Section of the Canadian Bar Association (B.C.

Heppell taught corporate finance and corporate governance courses at the University of British Columbia, Simon Fraser University and at a number of biotechnology conferences for numerous years.

He is currently a director of a number of public and private life science companies, including Emerald Health Sciences.

The Board considered Mr.

Heppell’s significant experience with life science and technology companies in making the decision to appoint him as a director of the Company.

Heppell’s significant experience with life science and technology companies and the public markets in making the decision to appoint him as a director of the Company.

Margaret Dalesandro.

Margaret Dalesandro currently serves on the board of OncoSec Medical Incorporated, a company listed on NASDAQ and a late-stage biotechnology company focused on designing, developing and commercializing innovative therapies and proprietary medical approaches to stimulate and guide an anti-tumor immune response for the treatment of cancer.

In addition, Dr.

Dalesandro is currently the President of Brecon Pharma Consulting LLC.

Dalesandro has over twenty-five years of experience leading strategic product development in the pharmaceutical, biotechnology and diagnostics industries.

She has previously served as a Business Director of Integrative Pharmacology at Corning, Incorporated, as a Vice President of Project, Portfolio and Alliance Management at ImClone Systems Inc., as an Executive Director of Project and Portfolio Management at GlaxoSmithKline, and as a Senior Consultant at Cambridge Pharma Consultancy over the course of her career.

Dalesandro earned her Ph.D.

in Biochemistry from Bryn Mawr College and completed a NIH Post-Doctoral Fellowship in Molecular Immunology at the Wake Forest University School of Medicine.

The Board considered Dr.

Dalesandro’s significant experience with life science and technology companies in making the decision to appoint her as a director of the Company.

Richard Janney.

Richard Janney currently is an independent contractor at RoseRyan, Inc.

(“RoseRyan”), a professional services firm which provides accounting and financial advisory services to the Company on a regular basis.

Janney currently serves as the acting Chief Financial Officer of Pinnacle Engines and Tempathic, Inc.

on a part-time basis.

Prior to Tempathic, Inc., Mr.

Janney served as the Chief Financial Officer of Thinc, Inc.

from September 2018 to August 2019, and as the Chief Executive Officer of AFFARI, LLC from 2011 to 2019.

Janney also served as the principal accounting officer of several public and private companies, including Trident Microsystems, Inc., a NASDAQ listed company, and Asyst Technologies, Inc., a NASDAQ listed company.

Janney’s experience also includes being a manager at PricewaterhouseCoopers.

Janney received a B.S.

degree from California Polytechnic University San Luis Obispo in Business Administration with an emphasis in Finance and Accounting.

Section 16(a) Beneficial Ownership Reporting Compliance

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SEC regulation requires executive officers, directors and greater than 10% stockholders to furnish us with copies of all Section 16(a) forms they file.

Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during the year ended December 31, 2019, our executive officers, directors, and greater than 10% stockholders complied with all applicable filing requirements, except for one Form 4 for Emerald Health Sciences, which reported one transaction and was due on December 24, 2019 but was filed on January 28, 2020.

Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during the year ended December 31, 2020, our executive officers, directors, and greater than 10% stockholders complied with all applicable filing requirements on a timely basis, except that a Form 4 was filed late by Margaret Dalesandro, resulting in one transaction not being reported on a timely basis.

Family Relationships

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During 2020, our Board met four times (including telephonic meetings) and took action by written consent 17 times.

Each director attended at least 75% of the meetings held by the Board and by each committee on which he served while he was a director, either in person or by teleconference, during the year.

Each director attended at least 75% of the meetings held by the Board and by each committee on which she or he served while she or he was a director, either in person or by teleconference, during the year.

Director Attendance at Annual Meetings

Although we do not have a formal policy regarding attendance by members of our Board at each annual meeting of stockholders, we encourage all of our directors to attend.

All of our directors attended our most recent annual general meeting of stockholders.

Audit Committee and Financial Expert

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The members of our audit committee are Mr.

Punit Dhillon and Mr.

Dhillon serves as chairman of the audit committee and our Board has determined that he is an “audit committee financial expert” as defined by applicable SEC rules.

Jim Heppell and Dr.

Margaret Dalesandro.

Jim Heppell serves as chairman of the audit committee and our Board has determined that he is an “audit committee financial expert” as defined by applicable SEC rules.

The Board has determined that Mr.

Dhillon and Mr.

Heppell are independent directors as that term is defined in Rule 5605(a)(2) of the Nasdaq Listing Rules, and we have determined that both Mr.

Dhillon and Mr.

Heppell as audit committee members meet the more stringent requirements under Rule 5605(c)(2) of the Nasdaq Listing Rules.

Our audit committee met four times (including telephonic meetings) and took action by written consent one time in 2019.

Jim Heppell and Dr.

Margaret Dalesandro are independent directors as that term is defined in Rule 5605(a)(2) of the Nasdaq Listing Rules, and we have determined that both Mr.

Jim Heppell and Dr.

Margaret Dalesandro as audit committee members meet the more stringent requirements under Rule 5605(c)(2) of the Nasdaq Listing Rules.

Our audit committee met two times (including telephonic meetings) and took action by written consent one time in 2020 as compensation matters were handled directly by our Board.

Our audit committee is responsible for:

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The members of our compensation committee are Mr.

Punit Dhillon and Mr.

Heppell serves as chairman of the compensation committee.

Our compensation committee did not meet during 2019 (including telephonic meetings) and took action by written consent one time.

Jim Heppell and Dr.

Margaret Dalesandro.

Jim Heppell serves as chairman of the compensation committee.

Our compensation committee did not meet or take action by written consent during 2020.

Our compensation committee is responsible for the oversight of, and the annual and ongoing review of, the Chief Executive Officer, the compensation of the senior management team, and the bonus programs in place for employees, which includes:

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In 2018, our Board established a nominating and corporate governance committee that operates under a written charter approved by the Board.

The members of our nominating and corporate governance committee are Mr.

Punit Dhillon and Mr.

Heppell serves as chairman of the nominating and corporate governance committee.

Our nominating and corporate governance committee did not meet or take action by written consent in 2019.

The members of our nomination and corporate governance committee are Mr.

Jim Heppell and Dr.

Margaret Dalesandro.

Margaret Dalesandro serves as chairman of the nomination and corporate governance committee.

Our nomination and corporate governance committee met once during 2020 (including telephonic meetings) and took action by written consent one time.

Our nominating and corporate governance committee is responsible for assisting the Board in (1) identifying qualified individuals to become Board members, consistent with criteria approved by the Board, (2) determining the composition of the Board and its committees, (3) selecting the director nominees for the next annual meeting of shareholders, (4) monitoring a process to assess Board, committee and management effectiveness, (5) aiding and monitoring management succession planning and (6) developing, recommending to the Board, implementing and monitoring policies and processes related to our corporate governance guidelines.

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Punit Dhillon serves as chairman of the finance and business development committee.

Our finance and business development committee did not meet and took action by written consent three times in 2019.

Our finance and business development committee did not meet but took action by written consent three times in 2020.

Our finance and business development committee is responsible for assisting the Board in (1) matters affecting our balance sheet, including capital structure strategies, debt and equity financings and working capital (2) analysis and assessment of financial and strategic aspects of major acquisitions and divestitures, collaborations and joint ventures, (3) formulating and recommending for approval to the Board our financial policies, including management of the financial affairs of the Company, (4) developing and maintaining relationships with investment banks, financial institutions and other investors and monitor developments in the capital markets and financing trends, and (5) evaluating and making recommendations to the Board concerning business development opportunities.

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We do not currently have any specific or minimum criteria for the election of nominees to the Board.

The Board, with the help of its nomination and corporate governance committee, will assess all candidates, whether submitted by management or shareholders and make recommendations for election or appointment.

The Board, with the help of its nomination and corporate governance committee, will assess all candidates and make recommendations for election or appointment.

Stockholder Communications

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On October 31, 2014, we adopted a formal code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, as well as our other officers, directors and employees.

A copy of our code of ethics is available on our website at http://www.emeraldbio.life .

A copy of our code of ethics is available on our website at http://www.skyebioscience.com .

We intend to disclose any future amendments to provisions of our code of ethics, or waivers of provisions required to be disclosed under the rules of the SEC, on a current report on Form 8-K or at the same location on our website identified in the preceding sentence.

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Other Compensation

Doug Cesario,

Richard Janney

Interim PAO (2)

Punit Dhillon

Former CEO/ CMO (3)

Elena Traistaru,

Former Interim PFA (4)

Douglas Cesario,

Former CFO (5)

Former CMO (6)

Avtar Dhillon,

Former Executive Chairman (7)

Lykos, Former

Amounts reflect the full grant date fair value of restricted stock awards and stock options, computed in accordance with ASC Topic 718, rather than the amounts paid to or realized by the named individual.

Berecz separated from us, effective May 25, 2018, pursuant to a Separation Agreement and Release between us and Ms.

Dhillon resigned as Chairman and member of our Board of Directors, effective December 17, 2019.

For the year 2018, option awards granted to Dr.

Dhillon represent compensation for services rendered as a member of our Board and other compensation includes $45,000 earned under the Independent Contractor Agreement (defined below) and $22,885 in fees earned for services rendered as a member of our Board.

Amounts reflect the full grant date fair value of stock options and awards, computed in accordance with ASC Topic 718, rather than the amounts paid to or realized by the named individual.

For the year ended December 31, 2020, other compensation consists of consulting fees charged to the Company by RoseRyan, Inc.

Richard Janney’s services.

Brian Murphy separated from us, effective August 7, 2020, pursuant to a Separation and Release Agreement between us and Dr.

For the year ended December 31, 2020, other compensation consists of severance payable under Mr.

Murphy’s Separation and Release Agreement.

Elena Traistaru resigned as Interim Principal Accounting Officer, effective September 25, 2020.

For the year ended December 31, 2020, other compensation consists of consulting fees charged to the Company by Ms.

Traistaru’s consulting company.

Douglas Cesario separated from us, effective May 15, 2020, pursuant to a Separation and Release Agreement between us and Mr.

For the year ended December 31, 2020, other compensation consists of severance payable under the Separation and Release Agreement.

Dennis Kim resigned as Chief Medical Officer, effective November 6, 2020.

Avtar Dhillon resigned as Chairman and member of our Board of Directors, effective December 17, 2019.

For the year 2020, other compensation consists of consulting fees earned under the Independent Contractor Agreement (defined below).

See “Director Compensation” below.

For the year 2019, other compensation represents fees earned for services rendered as a member of our Board of Directors.

In June 2014, our subsidiary entered into an independent contractor agreement with K2C, Inc.

(“K2C”), which is wholly owned by Mr.

Lykos, pursuant to which we paid K2C a monthly fee for services performed by Mr.

Lykos for us.

The agreement expired on June 1, 2017 and was automatically renewed for one year pursuant to the terms of the agreement.

The monthly fee under the agreement was $10,000 until April 1, 2017, at which time it increased to a monthly fee of $20,000.

Under the agreement, Mr.

Lykos was also eligible to participate in our health, death and disability insurance plans.

In addition, beginning in 2015, Mr.

Lykos was a participant in our change in control severance plan.

Effective February 28, 2018, we terminated the independent contractor agreement.

Lykos resigned from the Board, effective January 18, 2018, in connection with the consummation of the investment in us by Emerald Health Sciences.

Employment and Severance Arrangements

Employment Agreements

In May 2018, we entered into an Executive Employment Agreement with Doug Cesario, our Chief Financial Officer.

The agreement provides for an annual base salary of $250,000 per year and an annual discretionary bonus based in part on Mr.

Cesario’s achievement of milestones agreed to by the Board or the Compensation Committee of the Board.

Pursuant to the agreement, Mr.

Cesario is entitled to receive the normal benefits available to other similarly situated executives and will be entitled to severance pay under certain circumstances.

Cesario’s employment with us is at-will.

Employment Agreement

On August 7, 2020, we entered into an employment agreement with Mr.

Punit Dhillon, our Chief Executive Officer.

The agreement provides for an annual base salary of $400,000 per year and an annual discretionary bonus up to fifty percent (50%) of his base salary based on Mr.

Punit Dhillon’s achievement of annual corporate milestones agreed to by the Board.

Punit Dhillon will also receive the normal benefits available to other similarly situated executives and will be entitled to severance pay under the circumstances described below.

Punit Dhillon’s employment with the Company is at-will.

Except for termination of Mr.

Cesario’s employment for “Cause,” “By Death” or “By Disability” (as such terms are defined in the agreement), Mr.

Cesario will be entitled to payment of an amount equal to a minimum of six months of Mr.

Cesario’s then-current base salary; and after three years of employment, Mr.

Cesario will be entitled to an additional two months of his then-current base salary for each year he is employed beyond the initial three years of employment by us, to a maximum of 12 months.

Pursuant to Mr.

Cesario’s Executive Employment Agreement, Mr.

Cesario was granted a one-time sign-on restricted stock award of 643,501 shares of restricted stock pursuant to our 2014 Omnibus Incentive Plan on July 23, 2018, which is the date that was 90 days after Mr.

Cesario’s start date as an employee with us.

100% of the restricted stock award will vest on April 23, 2020, or upon a trigger event, including the sale of the Company or a merger that results in a change of control.

In August 2019, we entered into a letter agreement with Dr.

Dennis Kim, our Chief Medical Officer.

The agreement provides for an annual base salary of $330,000 per year and an annual discretionary bonus target of up to 35% of annual salary.

Pursuant to the agreement, Dr.

Kim is entitled to receive the normal benefits available to other similarly situated executives and will be entitled to severance pay under circumstances.

Kim’s employment with us is at-will.

Except for termination of Dr.

Kim’s employment for “Cause,” by death or by “Disability” (as such terms are defined in the agreement), Dr.

Kim will be entitled to payment of an amount equal to six months of his then-current base salary for the first full year of continuous employment with us or twelve months after the first full year.

Kim may take on advisory and consulting roles for up to 20% of his time so long as such roles do not conflict with the performance of his duties and responsibilities with us.

Pursuant to Dr.

Kim’s agreement, Dr.

Kim was granted a one-time sign-on award of options to purchase an aggregate of 736,541 shares of our common stock of pursuant to the Plan.

Subject to continued employment with us, the stock options vested 25% 90 days after his employment commenced and the remaining 75% vests 1/33 rd on each of the next 33 months thereafter.

The foregoing description of the employment agreements does not purport to be complete and is qualified in its entirety by reference to the full text of the employment agreements attached hereto as an exhibit and incorporated by reference herein.

Punit Dhillon’s employment for “Cause,” “By Death” or “By Disability” (as such terms are defined in his employment agreement), Mr.

Punit Dhillon will be entitled to a minimum six months’ severance if he is terminated by the Company without cause.

Under his employment agreement, Mr.

Punit Dhillon will be eligible to receive a 12-months’ severance if he is employed by the Company for at least 12 months commencing on August 10, 2020, or a 24 months’ severance if he is employed by the Company for at least 24 months commencing on August 10, 2020.

In connection with his appointment, the Company granted Mr.

Punit Dhillon options to purchase 9,000,000 shares of the Company’s common stock at an exercise price of $0.045 per share (the then market price of the Company’s shares), with 10% of such options vested immediately upon grant and the remaining 90% vesting equally on each six-month anniversary of the grant date over four and a half years.

The foregoing description of the employment agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the employment agreements attached hereto as an exhibit and incorporated by reference herein.

Severance Arrangements

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(i) a lump sum cash payment equal to at least six months’ of the executive’s monthly compensation, plus an additional month for each full year of service over six years, (ii) Company-paid premiums for continued health insurance for a period equal to the length of the cash severance period or, if earlier, when executive becomes covered under a subsequent employer’s healthcare plan, and (iii) full vesting of all then-outstanding unvested stock options and restricted stock awards.

The restricted stock award and options granted to Mr.

Cesario in July 2018, will vest in full on a change in control (as defined in our 2014 Omnibus Incentive Plan).

In January 2018, we entered into a restricted stock agreement (the “Restricted Stock Agreements”) with each of Dr.

Murphy, Elizabeth Berecz and Cosmas N.

Lykos granting 900,000, 700,000 and 900,000 shares of restricted Common Stock, respectively.

Each Restricted Stock Agreement provides that if the executive’s employment or service is terminated by us without cause, or is terminated by the grantee for good reason, then the executive shall be entitled to receive a cash severance payment equal to six months of their base compensation, payable in substantially equal installments during the six-month period following the termination date.

In February 2018, we entered into a separation and release agreement with K2C, which provided for a lump sum payment of $180,000 and the immediate vesting of 900,000 shares of restricted common stock granted pursuant to the Restricted Stock Agreement, 325,000 shares of restricted common stock granted on October 20, 2015, 125,000 options granted on November 21, 2014, in exchange for a release of claims and certain other agreements.

In addition, K2C also holds 1,110,000 shares of fully vested common stock pursuant to the common stock purchase warrant agreement dated June 20, 2013.

In April 2018, we entered into a Separation Agreement and Release with Elizabeth Berecz, our former Chief Financial Officer.

Pursuant to the agreement, Ms.

Berecz agreed to certain ongoing cooperation obligations during a transition period and agreed to provide certain releases and waivers as contained in the agreement.

As consideration under the agreement, we agreed to provide Ms.

Berecz compensation and benefits as follows:

(i) through May 25, 2018, Ms.

Berecz’s separation date, an annualized base salary at the rate in effect as of the date of the separation agreement; (ii) a lump sum gross payment of $145,833, in consideration for the restrictive covenants contained in the separation agreement; and (iii) reimbursement for payments made by Ms.

Berecz for COBRA coverage for a period of six (6) months following her separation date.

In addition, the terms of the separation agreement provided for the immediate vesting of 700,000 shares of restricted common stock granted pursuant to Ms.

Berecz’s Restricted Stock Agreement, 350,000 shares of restricted common stock granted on October 20, 2015, and 250,000 options granted in October 2014 and November 2014.

The foregoing descriptions of the separation agreements do not purport to be complete and are qualified in their entirety by reference to the full text of such separation agreements attached hereto as exhibits and incorporated by reference herein.

On April 29, 2020, we entered into a Separation and Release Agreement with Mr.

Douglas Cesario.

Cesario’s separation was effective May 15, 2020.

Pursuant to the Separation and Release Agreement, Mr.

Cesario agreed to certain ongoing cooperation obligations and to provide certain releases and waivers as contained in the Separation and Release Agreement.

As consideration, we agreed to provide Mr.

Cesario compensation and benefits in accordance with his Employment Agreement as follows:

(i) through the Separation Date, an annualized base salary at the rate in effect for him as of the date of the Separation and Release Agreement;

(ii) a gross payment of $125,000 in consideration for the restrictive covenants contained in the Separation and Release Agreement;

and (iii) a continuation of health insurance benefits for reimbursement for a period of six months following the Separation Date.

On August 7, 2020, we entered into a Separation and Release Agreement with Dr.

Brian Murphy, pursuant to which, Dr.

Murphy resigned as the Company’s Chief Executive Officer and a member of the Board, effective August 7, 2020.

Pursuant to the Separation and Release Agreement, Dr.

Murphy has agreed to certain ongoing cooperation obligations and to provide certain releases and waivers as set out in the Separation and Release Agreement.

As consideration, we have agreed to provide Dr.

Murphy with certain compensation and benefits in accordance with his Employment Agreement as follows:

(i) an aggregate gross sum of $195,000, less federal and state withholdings, as salary continuation over six months in accordance with the Company’s standard biweekly payroll practice;

and (ii) Company’s healthcare benefits (for similarly situated executives as amended from time to time), for a period of six months from the Separation Date.

The foregoing descriptions of the separation and release agreements do not purport to be complete and are qualified in their entirety by reference to the full text of such separation and release agreements attached hereto as exhibits and incorporated by reference herein.

Outstanding Equity Awards at Fiscal Year-end

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Vested ($) (1)

(1) 10/31/2014

(1) 11/21/2014

Doug Cesario,

(3) 5/25/2018

(4) 5/25/2018

Dennis Kim, CMO

(7) 8/21/2019

Avtar Dhillon,

Former Chairman

Punit Dhillon,

(2) 10/10/2018

(1) The options specified above vest as follows:

20% of total vests on each anniversary of the grant date over five years, subject to the grantee’s continued service.

The options granted expire ten years after the date of grant.

The market value of shares that have not vested is calculated based on the per share closing price of our common stock on December 31, 2020.

The options specified above vest as follows:

25% of total vests on the grant date and 1/33 each month thereafter on the anniversary of the grant date.

(4) The restricted stock vests in full on the two-year anniversary of the grant date, subject to the grantee’s continued service.

(5) The options specified above vest in twelve equal monthly installments following the grant date.

(6) The restricted stock vests 1/2 each year on the anniversary of the grant date and is subject to acceleration upon termination.

1/12 each month on the anniversary of the grant date.

The options specified above vest as follows:

25% of the total vests 90 days after his employment commenced and the remaining 75% vests 1/33 each of the next 33 months thereafter.

Non-Equity Incentive Plan Awards

In May 2018, in connection with the appointment of Mr.

Cesario as our Chief Financial Officer and pursuant to the terms of the Executive Employment Agreement between Mr.

Cesario and us, we entered into a stock option award agreement with Mr.

Cesario pursuant to which Mr.

Cesario was granted non-qualified stock options to purchase an aggregate of 1,195,073 shares of our common stock at an exercise price of $0.245 per share on July 23, 2018.

25% of the options vested on the date of grant and the remaining 75% of the options vest 1/33 on each of the next 33 months thereafter.

The options will fully vest upon a trigger event, including the sale of the Company or a merger that results in a change of control.

10% of total vests on the grant date and 1/10 vests semi-annually on the anniversary of the grant date thereafter.

Exercises of Options

1 unchanged sentence

Director Compensation

On October 10, 2018, we amended our policy for the compensation of our non-employee directors as follows:

Each non-employee director will receive a cash retainer of $40,000 on an annual basis, and the executive chair of the Board, if a non-employee director, will receive an additional $40,000 retainer annually.

Upon election to the Board, non-employee directors will receive a one-time award of 200,000 stock options which will vest in twelve equal monthly installments.

In subsequent annual periods, each non-employee director will receive a grant of 100,000 common stock options which will vest in twelve equal monthly installments.

Non-employee directors who serve as members of special committees of the Board will receive additional compensation as follows:

Since October 2018, our policy for the compensation of our non-employee directors has been as follows:

Each non-employee director receives a cash retainer of $40,000 on an annual basis, and an executive chair of the Board, if one is appointed as such and is a non-employee director, receives an additional $40,000 retainer annually.

Upon election to the Board, non-employee directors receive a one-time award of 200,000 stock options which vest in twelve equal monthly installments.

In subsequent annual periods, each non-employee director receives a grant of 100,000 common stock options which vest in twelve equal monthly installments.

Non-employee directors who serve as members of special committees of the Board receive additional compensation as follows:

Audit Committee:

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Finance and Business Development Special Committee:

$40,000 per year for the chair (no compensation for other members)

$40,000 per year for a non-employee member (no compensation for employee members)

Our directors received the following compensation for their service as our directors during the fiscal year ended December 31, 2020.

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Punit Dhillon

Avtar Dhillon

Margaret Dalesandro

Does not include compensation received for services provided as executive officers.

(2) Each non-employee director is entitled to an annual grant of 100,000 common stock options that vest in twelve equal monthly installments.

However, no option grants were approved by the Board of Directors in 2019.

Each non-employee director is entitled to an annual grant of 100,000 common stock options, all of which vest in twelve equal monthly installments.

However, no annual option grants were approved by the Board of Directors in 2020.

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Securities Authorized for Issuance under Equity Compensation Plans

The table below includes the following information as of December 31, 2019 for the Emerald Bioscience, Inc.

2014 Omnibus Incentive Plan.

The table below includes the following information as of December 31, 2020 for the Company’s 2014 Omnibus Incentive Plan.

Shares available for issuance under the 2014 Omnibus Incentive Plan can be granted pursuant to stock options, stock appreciation rights, restricted stock, restricted stock unit awards, performance awards and other stock-based or cash-based awards, as selected by the plan administrator.

For additional information about the 2014 Omnibus Incentive Plan, refer to Note 6 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

For additional information about the 2014 Omnibus Incentive Plan, refer to Note 6 in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Equity Compensation Plan Information

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Equity compensation plans approved by security holders

Equity compensation plans not approved by security holders (1)

(1) Reflects 1,195,073 shares of common stock issuable upon exercise of stock options granted to Mr.

Cesario with an exercise price equal to $0.245 pursuant to a Stock Option Agreement.

Security Ownership of Certain Beneficial Owners and Management

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As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person’s actual voting power at any particular date.

The information set forth in the table below is based on 183,207,747 shares of our common stock issued and outstanding on March 16, 2020.

The information set forth in the table below is based on 350,007,749 shares of our common stock issued and outstanding on February 23, 2021.

To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.

Unless otherwise indicated, the address of each beneficial owner listed below is 130 North Marina Drive, Long Beach, CA 90803.

Unless otherwise indicated, the address of each beneficial owner listed below is 5910 Pacific Center Blvd.

Suite 320, San Diego, CA 92121.

Name and Address of Beneficial Owner

Emerald Health Sciences, Inc.

126,564,590 (2)

1,930,000 (3)

1,512,645 (4)

Punit Dhillon

Richard Janney

Elena Traistaru

Douglas Cesario

Margaret Dalesandro

Avtar Dhillon

All executive officers and directors as a group (9 persons)

*Denotes less than 1% of our outstanding shares of common stock.

(1) The address of this entity is Office 8262, The Landing, 200 - 375 Water St., Vancouver, British Columbia, Canada V6B 0M9.

(2) Includes (i) 113,953,917 shares of common stock, (ii) 7,500,000 shares issuable on exercise of warrants and (iii) 5,110,673 shares issuable upon the conversion of outstanding principal and accrued interest associated with the Credit Agreement.

(3) Includes (i) 655,000 shares of common stock underlying options that may be exercised within 60 days of March 16, 2020, (ii) 1,275,000 shares of fully vested restricted stock.

(4) Includes (i) 869,144 shares of common stock underlying options that may be exercised within 60 days of March 16, 2020, and (ii) 643,501 shares of restricted stock subject to vesting.

(5) Includes 267,833 shares of common stock underlying options that may be exercised within 60 days of March 16, 2020.

(6) Includes 200,000 shares of common stock underlying options that may be exercised within 60 days of March 16, 2020.

(7) Includes 200,000 shares of common stock underlying options that may be exercised within 60 days of March 16, 2020.

The address of Emerald Health Sciences is 8262, The Landing, 200 - 375 Water St., Vancouver, British Columbia, Canada V6B 0M9.

Includes (i) 111,387,251 shares of common stock, (ii) 7,500,000 shares issuable on exercise of warrants and (iii) 5,178,244 shares issuable upon the conversion of outstanding principal and accrued interest associated with the Amended Credit Agreement.

Includes 2,000,000 shares of common stock underlying options that may be exercised within 60 days of February 23, 2021.

Includes 525,000 shares of common stock underlying options that may be exercised within 60 days of February 23, 2021.

Includes 81,250 shares of common stock underlying options that may be exercised within 60 days of February 23, 2021.

Brian Murphy separated from us, effective August 7, 2020, pursuant to a Separation and Release Agreement between us and Dr.

Douglas Cesario separated from us, effective May 15, 2020, pursuant to a Separation and Release Agreement between us and Mr.

Includes 1,975,000 shares of common stock underlying options that may be exercised within 60 days of February 23, 2021.

Avtar Dhillon resigned as Chairman and member of our Board of Directors, effective December 17, 2019.

Elena Traistaru resigned as Interim Principal Accounting Officer, effective September 25, 2020.

Dennis Kim resigned as Chief Medical Officer, effective November 6, 2020.

Changes in Control

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Except as specified below, there have been no other transactions with related persons in the last two fiscal years, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeds the lesser of $120,000 or 1% of the average of our total assets as of December 31, 2020 and 2019, and in which any related person had or will have a direct or indirect material interest.

In June 2014, our subsidiary entered into an independent contractor agreement with K2C, which is wholly owned by Mr.

Lykos, who served as the Chairman of our Board until January 16, 2018, pursuant to which we paid K2C a monthly fee for services performed by Mr.

Lykos for us.

The agreement expired on June 1, 2017 and was automatically renewed for one year pursuant to the terms of the agreement.

The monthly fee under the agreement was $10,000 and increased to $20,000 effective April 1, 2017.

In 2017 and 2018, we paid K2C $210,000 and $220,000 respectively.

Under the agreement, Mr.

Lykos was also eligible to participate in our health, death and disability insurance plans.

The independent contractor agreement with K2C was terminated as of February 28, 2018.

In January 19, 2018, we entered into a Restricted Stock Agreement with K2C granting 900,000 Restricted Stock to K2C.

In February 28, 2018, we entered into a separation and release agreement with K2C, which provided for a lump sum payment of $180,000 and the immediate vesting of 900,000 shares of restricted common stock granted pursuant to the Restricted Stock Agreement, 325,000 shares of restricted common stock granted on October 20, 2015, 125,000 options granted on November 21, 2014, in exchange for a release of claims and certain other agreements.

In addition, K2C also holds 1,110,000 shares of fully vested common stock pursuant to the common stock purchase warrant agreement dated June 20, 2013.

Elizabeth Berecz

In April 2018, we entered into a Separation Agreement and Release with Elizabeth Berecz, our former Chief Financial Officer.

Pursuant to the agreement, we agreed to provide Ms.

Berecz compensation and benefits as follows:

(i) through May 25, 2018, Ms.

Berecz for COBRA coverage for a period of six (6) months following her separation date.

In addition, the terms of the separation agreement provided for the immediate vesting of 700,000 shares of restricted common stock granted pursuant to Ms.

Berecz’s Restricted Stock Agreement, 350,000 shares of restricted common stock granted on October 20, 2015, and 250,000 options granted in October 2014 and November 2014.

Emerald Health Sciences

On December 28, 2017, we entered into a Secured Promissory Note and Security Agreement for a convertible loan (the “Convertible Promissory Note”) with Emerald Health Sciences.

The Convertible Promissory Note provided for aggregate gross proceeds to us of up to $900,000 and was secured by all of our assets.

On January 19, 2018, $900,000 funded under the Convertible Promissory Note converted into 9,000,000 shares of our common stock and the Convertible Promissory Note was terminated.

Simultaneously, we entered into a Securities Purchase Agreement (the “Emerald Health Sciences Financing”) in which we sold to Emerald Health Sciences 15,000,000 shares of common stock and a warrant to purchase 20,400,000 shares of common stock at an exercise price of $0.10 for aggregate gross proceeds of $1,500,000.

The second closing under the Emerald Health Sciences Financing occurred on February 16, 2018, pursuant to which we issued and sold to Emerald Health Sciences 15,000,000 shares of our Common Stock, and a warrant to purchase 20,400,000 shares of Common Stock at an exercise price of $0.10 per share for a term of five years, for aggregate gross proceeds of $1,500,000.

On February 1, 2018, we entered into an Independent Contractor Agreement (the “Independent Contractor Agreement”) with Emerald Health Sciences, pursuant to which Emerald Health Sciences agreed to provide such services as were mutually agreed between Emerald Health Sciences and us, including reimbursements for reasonable expenses incurred in the performance of the Independent Contractor Agreement.

These services included, but were not limited to, corporate advisory services and technical expertise in the areas of business development, marketing, investor relations, information technology and product development.

The Independent Contractor Agreement had an initial term of ten years and specified compensation which was agreed upon between our chief executive officer and Emerald Health Sciences’ Chairman, CEO and President on a month-to-month basis.

Under this agreement, we incurred expenses of $542,000 and $550,000 during the years ended December 31, 2019 and 2018, respectively.

At December 31, 2019, the Company has accrued $10.000 in expenses under this agreement.

In January 2018, we entered into a securities purchase agreement with Emerald Health Sciences, pursuant to which Emerald Health Sciences purchased a majority of the outstanding equity in us, resulting in a change in control of the Company.

As part of the transaction, the members of Board of the Company, with the exception of Dr.

Brian Murphy, our former CEO, tendered their resignation, and Emerald Health Sciences appointed two nominees to the Board.

In October 2018, the Board appointed Dr.

Avtar Dhillon, the Chairman, CEO and President of Emerald Health Sciences, as the Executive Chairman of the Board.

On December 17, 2019, the Board accepted the resignation of Dr.

Avtar Dhillon, who offered his resignation as the Executive Chairman of the Board and the position of Chairman of the Finance and Business Development Committee of the Board.

The Board also appointed Punit Dhillon, an existing member of the Board, as Chairman of the Board and as Chairman of the Finance and Business Development Committee of the Board, to fill the vacancies in such offices created by the resignation of Dr.

Avtar Dhillon.

On August 7, 2020, Mr.

Punit Dhillon was appointed the CEO of the Company and tendered his resignation as Chairman of the Audit Committee and a member of the Compensation Committee and the Nomination and Corporate Governance Committee.

On February 1, 2018, we entered into an Independent Contractor Agreement (the “Independent Contractor Agreement”) with Emerald Health Sciences, pursuant to which Emerald Health Sciences agreed to provide such services as are mutually agreed between the Company and Emerald Health Sciences, including reimbursements for reasonable expenses incurred in the performance of the Independent Contractor Agreement.

These services may include, but are not limited to, corporate advisory services and technical expertise in the areas of business development, marketing, investor relations, information technology and product development.

The Independent Contractor Agreement had an initial term of ten years and specified compensation to be agreed upon between the Company’s chief executive officer and Emerald Health Sciences’ CEO on a month-to-month basis.

The fee due under this agreement was payable on a monthly basis;

however, if we were unable to make payments due to insufficient funds, then interest on the outstanding balance is accrued at a rate of 12% per annum, calculated semi-annually.

Under this agreement, the Company incurred expenses of $542,000 during the year ended December 31, 2019.

As of December 31, 2019 and 2020, $7,032 remains unpaid.

The Independent Contractor Agreement was terminated effective December 31, 2019.

On February 6, 2018, we entered into a Consulting Agreement with Dr.

Avtar Dhillon, the Chairman, Chief Executive Officer and President of Emerald Health Sciences.

The services under the Consulting Agreement included, corporate finance and strategic business advisory.

The Consulting Agreement had an initial term of one year and was renewable automatically unless terminated by either party.

The agreement specified an annual fee of $60,000 payable semi-monthly in installments and included reimbursement for reasonable expenses incurred in the performance of the services.

The contractor was also entitled to an annual discretionary bonus, payable 120 days after each fiscal year-end, to be determined by the Board upon its annual review.

Under this agreement, we incurred expenses in the amount of $45,000 during the fiscal year ended December 31, 2018.

This Consulting Agreement was canceled on October 5, 2018 in connection with our entry into the Credit Agreement with Emerald Health Sciences and Dr.

Dhillon’s appointment as the Executive Chairman of our Board.

On October 5, 2018, we entered into the Credit Agreement with Emerald Health Sciences.

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At Emerald Health Sciences’ election, advances and unpaid interest may be converted into Common Stock at a fixed conversion price of $0.40, subject to customary adjustments for stock splits, stock dividends, recapitalizations, etc.

In connection with each advance under the Credit Agreement, we agreed to issue Emerald Health Sciences warrants to purchase shares of common stock in an amount equal to 50% of the number of shares of common stock that each advance may be converted into.

In connection with each advance under the Credit Agreement, we agreed, if requested by Emerald Health Sciences, to issue Emerald Health Sciences warrants to purchase shares of common stock in an amount equal to 50% of the number of shares of common stock that each advance may be converted into.

The warrants have an exercise price of $0.50 per share, a term of five years and will be immediately exercisable upon issuance.

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On March 29, 2019, we affected the third draw under the Credit Agreement in the amount of $2,000,000 and issued Emerald Health Sciences a warrant to purchase 2,500,000 shares of common stock at an exercise price of $0.50 per share, in accordance with the terms of the Credit Agreement.

On December 20, 2019, we entered into a Warrant Exchange Agreement, pursuant to which Emerald Health Sciences has exercised 40.80 million of such warrants and paid the aggregate exercise price of approximately $4.08 million for the related warrant shares in the form of a reduction of the corresponding amount of obligations outstanding under the Credit Agreement.

On December 20, 2019, we entered into a Warrant Exchange Agreement, pursuant to which Emerald Health Sciences exercised 40.8 million of such warrants and paid the aggregate exercise price of approximately $4.08 million for the related warrant shares in the form of a reduction of the corresponding amount of obligations outstanding under the Credit Agreement.

Upon consummation of the transaction under the Warrant Exchange Agreement, the total outstanding principal amount excluding discounts under the Credit Agreement was $2,014,500.

The Credit Agreement is still in place, however there is no guarantee of continued funding.

A portion of the proceeds raised in this offering may be used to pay, in whole or in part, the principal and accrued interest on our Credit Agreement.

See “Use of Proceeds.” The net proceeds of each advance shall be used for general corporate purposes and are subject to approval by our Board, which is controlled by the directors and principal executive officer of Emerald Health Sciences.

On April 29, 2020, we entered into an Amended and Restated Multi-Draw Credit Agreement with Emerald Health Sciences, which amends and restates the Credit Agreement, as reported in the current report on the Form 8-K filed with the SEC on April 29, 2020.

The Amended Credit Agreement provides for a credit facility to us in the principal amount of up to $20,000,000, which includes, without limitation, the advances totaling $6,000,000 that were granted prior to the amendment.

During the year ended December 31, 2020, we received the fourth and fifth advances of $150,000 and $300,000 pursuant to the Amended Credit Agreement.

The advances bear interest at 7% per annum and mature on October 5, 2022.

The Amended Credit Agreement is still in place;

however, there is no guarantee of continued funding under the Amended Credit Agreement.

A portion of the proceeds raised in this offering may be used to pay, in whole or in part, the principal and accrued interest on our Amended Credit Agreement.

See “Use of Proceeds.” The net proceeds of each advance shall be used for general corporate purposes.

On December 19, 2019, we entered into an Independent Contractor Services Agreement with Dr.

Avtar Dhillon, pursuant to which Dr.

Dhillon will provide ongoing corporate finance and strategic business advisory services to us.

Avtar Dhillon will provide ongoing corporate finance and strategic business advisory services to us.

In exchange for his services, Dr.

Dhillon will receive a monthly fee of $10,000, with (i) $5,000 paid each month and (ii) $5,000 accruing from the effective date and payable upon the Company’s completion of a material financing.

The Board will review the monthly rate paid to Dr.

Dhillon initially received a monthly fee of $10,000, with (i) $5,000 paid each month and (ii) $5,000 accruing from the effective date and payable upon the Company’s completion of a material financing.

On March 30, 2020, we amended the Independent Contractor Services Agreement by agreeing to defer payment of 100% of Dr.

Dhillon’s consulting fees until the Board of Directors determined that we had been sufficiently financed to make such payments at which point we would pay Dr.

Dhillon all his accrued consulting fees, and a bonus of 10% of his accrued consulting fees, less applicable tax and other withholdings.

The deferral was paid concurrent with the August 2020 Financing.

After the August 2020 Financing Dr.

Dhillon continues to receive a monthly fee of $10,000 per month for his services.

The Board reviews the monthly rate paid to Dr.

Dhillon within 90 days of the end of each fiscal year.

The Independent Contractor Services Agreement has an initial term of one year and will renew automatically thereafter unless terminated earlier by either party.

The Independent Contractor Services Agreement has an initial term of one year and automatically renews thereafter unless terminated earlier by either party.

The Independent Contractor Services Agreement may be terminated by either party for cause upon written notice to the other party if the other party defaults in the performance of the agreement in any material respect or materially breaches the terms of the agreement, or without cause upon 30 days’ prior written notice to the other party.

On December 19, 2019, we entered into a Board Observer Agreement with Emerald Health Sciences.

Under this agreement, for the years ended December 31, 2020 and 2019, we incurred fees of $127,387 and $3,871, respectively.

As of December 31, 2020, we have accrued $10,000 in expense related to the Independent Contractor Services Agreement.

On December 19, 2019, we entered into a Board Observer Agreement with Emerald Health Sciences, our largest shareholder.

The Board Observer Agreement gives a right to Emerald Health Sciences to designate one observer to our Board for so long as Emerald Health Sciences maintains ownership of any securities in the Company.

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Emerald Health Sciences appointed Dr.

Avtar Dhillon as an initial board observer.

Avtar Dhillon as its board observer.

The Board Observer Agreement may be terminated by either party for cause upon written notice to the other party if the other party defaults in the performance of the agreement in any material respect or materially breaches the terms of the agreement, or without cause upon 30 days’ prior written notice to the other party.

Emerald Health Biotechnology España, S.L.U.

In January 2021, we entered into a Collaborative Research Agreement with Emerald Health Biotechnology España, S.L.U, a subsidiary of Emerald Health Research, Inc.

which is 100% owned by Emerald Health Sciences.

Under the agreement, Emerald Health Biotechnology España, S.L.

will provide research and development services pursuant to an agreed upon project plan for the research and development of CBDVHS.

The term of the agreement is initially for a one-year period.

The agreement will terminate upon delivery and acceptance of the final deliverable under the project plan or if either party is in breach of the terms of the contract and such breach remains uncured for 45 days.

Payment for services rendered will be based on time and materials billable at reasonable market rates.

Douglas Cesario

In April 2020, we entered into a Separation and Release Agreement with Mr.

Douglas Cesario, our former Chief Financial Officer.

Cesario’s separation was effective May 15, 2020.

Pursuant to the agreement, Mr.

Cesario agreed to certain ongoing cooperation obligations and to provide certain releases and waivers to us as set out in the agreement.

As consideration, we agreed to provide Mr.

Cesario compensation and benefits in accordance with his Employment Agreement as follows:

(i) through May 15, 2020, an annualized base salary at the rate in effect for him as of the date of the agreement;

(ii) a gross payment of $125,000 in consideration for the restrictive covenants contained in the agreement;

and (iii) a continuation of health insurance benefits for a period of six months following May 15, 2020.

In addition, 325,929 unvested stock options granted to Mr.

Cesario were cancelled on May 15, 2020.

On August 7, 2020, we entered into a Separation and Release Agreement with Dr.

Brian Murphy, pursuant to which, Dr.

Murphy resigned as the Company’s Chief Executive Officer and a member of the Board, effective August 7, 2020.

Pursuant to the Separation and Release Agreement, Dr.

Murphy agreed to certain ongoing cooperation obligations and to provide certain releases and waivers to us as set out in the Separation and Release Agreement.

As consideration, we have agreed to provide Dr.

Murphy with certain compensation and benefits as follows:

(i) an aggregate gross sum of $195,000, less federal and state withholdings, as salary continuation over six months in accordance with our standard biweekly payroll practice;

and (ii) a continuation of health insurance benefits (for similarly situated executives as amended from time to time), for a period of six months from the Separation Date.

Review, Approval and Ratification of Related Party Transactions

Given our small size and limited financial resources, we have not adopted formal policies and procedures for the review, approval or ratification of transactions, such as those described above, with our executive officers, directors and significant stockholders.

However, all of the transactions described above were approved and ratified by our Board.

However, all of the transactions described above were approved and ratified by the independent members of our Board.

In connection with the approval of the transactions described above, our Board took into account several factors, including their fiduciary duties to the Company, the relationships of the related parties described above to the Company, the material facts underlying each transaction, the anticipated benefits to the Company and related costs associated with such benefits, whether comparable products or services were available, and the terms we could receive from an unrelated third party.

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Director Independence

We have determined that Punit Dhillon and Jim Heppell are independent members of our Board, as that term is defined in Rule 5605(a)(2) of the Nasdaq Listing Rules.

We have determined that Jim Heppell and Dr.

Margaret Dalesandro are independent members of our Board, as that term is defined in Rule 5605(a)(2) of the Nasdaq Listing Rules.

Insider Trading Policy

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All members of our Board and all executive officers are required to ratify the terms of this policy on an annual basis.

Our Insider Trading Policy is available on our website at http://www.emeraldbio.life .

Our Insider Trading Policy is available on our website at http://www.skyebioscience.com .

Principal Accounting Fees and Services .

The aggregate fees billed in each of the fiscal years ended December 31, 2020 and 2019, for professional services rendered by Mayer Hoffman McCann P.C.

for the audit of our annual consolidated financial statements included in our Annual Report on Form 10-K and quarterly reviews of the unaudited interim condensed consolidated financial statements included in our Quarterly Reports on Form 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were $328,514 and $260,550, respectively.

for the audit of our annual consolidated financial statements included in our Annual Report on Form 10-K and quarterly reviews of the unaudited interim condensed consolidated financial statements included in our Quarterly Reports on Form 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for 2020 and 2019 were $392,402 and $328,514, respectively.

Substantially all MHM’s personnel, who work under the control of MHM shareholders, are employees of wholly owned subsidiaries of CBIZ, Inc., which provides personnel and various services to MHM in an alternative practice structure.

Audit-Related Fees

All Other Fees

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Financial Statements.

The following consolidated financial statements of Emerald Bioscience, Inc., together with the report thereon of Mayer Hoffman McCann P.C., an independent registered public accounting firm, are included in this Annual Report on Form 10-K:

EMERALD BIOSCIENCE, INC.

The following consolidated financial statements of Skye Bioscience, Inc., together with the report thereon of Mayer Hoffman McCann P.C., an independent registered public accounting firm, are included in this Annual Report on Form 10-K:

SKYE BIOSCIENCE, INC.

AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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Consolidated Balance Sheets as of December 31, 2020 and 2019

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019 and 2018

Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2020 and 2019

Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019

Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2019 and 2018

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020 and 2019

Notes to the Consolidated Financial Statements

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To the Board of Directors and

Stockholders of Emerald Bioscience, Inc.

Stockholders of Skye Bioscience, Inc.

and Subsidiaries:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Emerald Bioscience, Inc.

and Subsidiaries (“Company”) as of December 31, 2019 and 2018, and the related consolidated statements of comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”).

We have audited the accompanying consolidated balance sheets of Skye Bioscience, Inc., formerly known as Emerald Bioscience, Inc., and Subsidiaries (“Company”) as of December 31, 2020 and 2019, and the related consolidated statements of comprehensive (loss) income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

We determined that there were no critical audit matters.

/s/ Mayer Hoffman McCann P.C.

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March 1, 2021

EMERALD BIOSCIENCE, INC.

SKYE BIOSCIENCE, INC.

AND SUBSIDIARIES

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Property and equipment, net

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable

Accounts payable to related party

Accounts payable - related party

Accrued interest - related party

Other current liabilities

Derivative liabilities

PPP loan current

Total current liabilities

Noncurrent liabilities

PPP loan non-current

Multi-draw credit agreement - related party

Convertible multi-draw credit agreement - related party, net of discount

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Total liabilities

Commitments and contingencies (Note 10)

Stockholders’ equity (deficit)

Stockholders’ equity

Preferred stock, $0.001 par value;

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(32,173,282 )

Total stockholders’ equity (deficit)

(15,562,252 )

Total liabilities and stockholders’ equity (deficit)

Total stockholders’ equity

Total liabilities and stockholders’ equity

See accompanying notes to the consolidated financial statements.

EMERALD BIOSCIENCE, INC.

SKYE BIOSCIENCE, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

Year Ended December 31,

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Fair value of derivative liabilities in excess of proceeds

Financing transaction costs

Loss on extinguishment of debt - related party

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Total other expense (income), net

Income (loss) before income taxes

(19,192,594 )

(Loss) income before income taxes

Provision for income taxes

Net income (loss) and comprehensive income (loss)

Net (loss) income and comprehensive (loss) income

$ (6,560,699 )

Earnings (loss) per common share:

Weighted average shares of common stock outstanding used to compute earnings (loss) per share:

(Loss) earnings per common share:

Weighted average shares of common stock outstanding used to compute (loss) earnings per share:

See accompanying notes to the consolidated financial statements.

EMERALD BIOSCIENCE, INC.

SKYE BIOSCIENCE, INC.

AND SUBSIDIARIES

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Cash flows from operating activities:

Net income (loss)

Net (loss) income

$ (6,560,699 )

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Loss on disposal of assets

Adjustments to reconcile net (loss) income to net cash used in operating activities:

Stock-based compensation expense

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Fair value of derivative liabilities in excess of proceeds

Financing transaction costs

Loss on extinguishment of debt - related party

Loss on common stock issuance from conversion of accrued interest

Amortization of debt discount

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Accounts payable

Accounts payable to related party

Accounts payable – related party

Accrued interest – related party

Other current liabilities

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Proceeds from warrant exercises

Proceeds from secured convertible promissory note - related party

Proceeds from convertible multi-draw credit agreement - related party, net of issuance costs

Proceeds from PPP loan

Proceeds from multi-draw credit agreement - related party, net of $0 and $9,301 issuance costs in 2020 and 2019, respectively

Prepayment of convertible multi-draw credit agreement - related party

Net cash provided by financing activities

Net (decrease) increase in cash and restricted cash

Net increase (decrease) in cash and restricted cash

Cash and restricted cash , beginning of year

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Reclassification of warrant liabilities to equity from exercise of warrants

Fair value of warrants issued in connection with financings

Conversion of outstanding preferred stock into common stock

Fair value of common stock issued in extinguishment of convertible debt and accrued interest

Conversion of outstanding preferred stock subject to redemption into common stock

See accompanying notes to the consolidated financial statements.

EMERALD BIOSCIENCE, INC.

SKYE BIOSCIENCE, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

Stockholders' Equity (Deficit)

Convertible Series F

Preferred Stock

Convertible Series D

Preferred Stock

Convertible Series B

Preferred Stock

Additional Paid-In

Total Stockholders' Equity

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Stockholders' Equity

Stockholders'

Balance, December 31, 2018

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Stock-based compensation expense

Common stock issued for services

Issuance of common stock net of issuance costs of $16,900

Conversion of Series B Preferred Stock and conversion liability into common stock at $0.10 and $0.001 per share

Conversion of Series D Preferred Stock to common stock at $0.10 per share

Conversion of Series F Preferred Stock to common stock at $0.10 per share

Conversion of secured convertible promissory note - related party and accrued interest

Series B warrant exercises

Issuance of common stock and warrants, net of issuance costs of $80,628

Warrants issued in connection with convertible multi-draw credit agreement, related party

Beneficial conversion feature in connection with convertible multi-draw credit agreement - related party

Net loss for the year ended December 31, 2018

(19,194,236 )

Series B warrant exercises

Exercise of Emerald financing warrants

Net income for the year ended December 31, 2019

Balance, December 31, 2019

$ (32,173,282 )

$ (15,562,252 )

Stock-based compensation expense

Issuance of common stock and warrants, net of issuance costs of $854,078

Warrants issued in connection with convertible multi-draw credit agreement, related party

Beneficial conversion feature in connection with convertible multi-draw credit agreement - related party

Exercise of pre-funded warrants

Series B warrant exercises

Exercise of Emerald financing warrants

Net income for the year ended December 31, 2019

Net loss for the year ended December 31, 2020

Balance, December 31, 2020

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See accompanying notes to the consolidated financial statements.

EMERALD BIOSCIENCE, INC.

SKYE BIOSCIENCE, INC.

AND SUBSIDIARIES

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Nature of Operations

Emerald Bioscience, Inc.

Skye Bioscience, Inc.

(the “Company”) was initially incorporated in Nevada on March 16, 2011 as Load Guard Logistics, Inc.

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On November 3, 2014, the Company changed its name to Nemus Bioscience, Inc.

by merging with Nemus Sub.

by merging with Nemus Sub to form a Nevada company.

In January 2018, the Company entered into a securities purchase agreement with Emerald Health Sciences, Inc.

(“Emerald Health Sciences”) discussed in Note 5, pursuant to which Emerald Health Sciences purchased a majority of the equity interest in the Company, resulting in a change in control.

(“Emerald Health Sciences”), pursuant to which Emerald Health Sciences purchased a majority of the equity interest in the Company, resulting in a change in control (the “Emerald Financing”).

As part of the transaction, the Company’s Board members, with the exception of Dr.

Brian Murphy, the Company’s CEO/CMO, tendered their resignation and Emerald Health Sciences appointed two new nominees to the Board.

Brian Murphy, the Company’s former CEO/CMO, tendered their resignation and Emerald Health Sciences appointed two new nominees to the Board.

Later, in October 2018, the Board appointed Dr.

Avtar Dhillon, the Chairman, Chief Executive Officer and President of Emerald Health Sciences, as the Executive Chairman of the Company’s Board.

On February 11, 2019, the Company’s Board of Directors (the “Board”) and majority stockholder unanimously approved an amendment to the Company’s articles of incorporation to change the name of the Company to Emerald Bioscience, Inc.

Effective March 25, 2019, the Company filed a Certificate of Amendment with the Nevada Secretary of State changing the Company’s name to Emerald Bioscience, Inc.

On August 7, 2020, Dr.

Brian Murphy resigned and Punit Dhillon was appointed as the Chief Executive Officer of the Company.

Effective March 25, 2019, the Company changed its name from Nemus Bioscience, Inc.

to Emerald Bioscience, Inc.

Effective January 19, 2021, the Company changed its name from Emerald Bioscience, Inc.

to Skye Bioscience, Inc.

In August 2019, the Company formed a new subsidiary in Australia, EMBI Australia Pty Ltd., an Australian proprietary limited company (“EMBI Australia”), in order to qualify for the Australian government’s research and development tax credit for research and development dollars spent in Australia.

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Refer to Note 11 - Related Party Matters for additional information.

The Company is a biopharmaceutical company located in Long Beach, California that plans to research, develop and commercialize therapeutics derived from cannabinoids through several license agreements with the University of Mississippi (“UM”).

The Company is a biopharmaceutical company located in San Diego, California that plans to research, develop and commercialize therapeutics derived from cannabinoids through several license agreements with the University of Mississippi (“UM”).

UM is the only entity federally permitted and licensed to cultivate cannabis for research purposes in the United States.

As of December 31, 2020, the Company has devoted substantially all its efforts to securing product licenses, carrying out research and development, building infrastructure and raising capital.

The Company has not yet realized revenue from its planned principal operations and is a number of years from potentially being able to do so.

The Company has not yet realized revenue from its planned principal operations and is a number of years away from potentially being able to do so.

Liquidity and Going Concern

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The Company anticipates that it will continue to incur operating losses into the foreseeable future in order to advance and develop a number of potential drug candidates into preclinical and clinical development activities and support its corporate infrastructure which includes the costs associated with being a public company.

As of December 31, 2019 and filing date of our 2019 Annual Report on Form 10K, the Company had cash in the amount of $1,829,977 and approximately $667,000, respectively.

During the year ended December 31, 2019, the Company received net cash proceeds of $3,990,699 from the Credit Agreement (defined below) with Emerald Health Sciences and raised $1,919,372 in net proceeds pursuant to the sale of common stock and warrants under a registered direct offering.

However, the Company’s cash flows from its financing efforts have been offset by cash used in operating activities of $6,027,941 for the year ended December 31, 2019.

As the Company approaches its first clinical trial, it expects to ramp up research and development spending and projects to increase cash used in operating activities.

However, based on the Company’s current cash position and expected cash requirements, without obtaining additional funding in the second quarter of 2020, management believes that the Company will not have enough funds to meet its obligations.

These conditions give rise to substantial doubt as to the Company’s ability to continue as a going concern.

As of December 31, 2020, the Company had unrestricted cash in the amount of $2,469,410.

From January 1, 2021 through February 23, 2021, the Company received $3,019,800 in proceeds from the exercise of warrants (Note 13).

The Company’s continued existence is dependent on its ability to raise sufficient additional funding to cover operating expenses and to carry out its research and development activities.

As the Company approaches its first clinical trial, it expects to ramp up research and development spending and to increase cash used in operating activities.

However, based on the Company’s expected cash requirements, without obtaining additional funding by the second half of 2021, management believes that the Company will not have enough funds to commence clinical studies.

These conditions give rise to substantial doubt as to the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.

The accompanying Consolidated Financial Statements do not include any adjustments that might result from the outcome of this uncertainty.

The Company’s continued existence is dependent on its ability to raise sufficient additional funding to cover operating expenses and to invest in research and development activities.

On October 5, 2018, the Company entered into a Multi-Draw Credit Agreement (the “Credit Agreement”) with Emerald Health Sciences (See Note 4).

As of December 31, 2019, under the Credit Agreement, the Company may draw down up to the remaining amount under the Credit Agreement of $14,000,000 from time to time in principal amounts of at least $250,000.

The drawdowns are subject to approval by the Company’s Board, which is controlled by the directors of Emerald Health Sciences.

We do not consider the facility available until advance requests are approved, drawn down and funded.

The Credit Agreement is still in place, however, there is no guarantee of continued funding.

On April 29, 2020, the Company entered into an Amended and Restated Multi-Draw Credit Agreement (the “Amended Credit Agreement”) with Emerald Health Sciences, which amends and restates the Credit Agreement.

The Amended Credit Agreement provides for a credit facility in the principal amount of up to $20,000,000, which includes, without limitation, the advances totaling $6,000,000 that were granted prior to the amendment.

Prior to the date of the Amended Credit Agreement, the Company had made three drawdowns in an aggregate principal amount of $6,000,000 and had issued to Emerald Health Sciences warrants to purchase an aggregate of 7,500,000 shares of common stock of the Company at an exercise price of $0.50 per share of the Company’s common stock, in accordance with the terms of the Credit Agreement.

During the year ended December 31, 2020, the Company effected the fourth and fifth advances under the Amended Credit Agreement in the amounts of $150,000 and $300,000, respectively.

Emerald Health Sciences elected that the fourth and fifth advances are not convertible into shares of Common Stock and no warrants were issued with the advances.

The Company used the proceeds from the advances for general corporate and working capital purposes.

As of December 31, 2020, the Company may draw down up to the remaining amount under the Amended Credit Agreement.

However, the Company does not consider the facility available until advance requests are approved, drawn down and funded.

The Amended Credit Agreement is still in place, however, there is no guarantee of continued funding.

On April 22, 2020, the Company entered into a Paycheck Protection Program Promissory Note in the principal amount of $116,700 (the “PPP Loan”) from City National Bank (the “PPP Loan Lender”).

The PPP Loan was obtained pursuant to the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S.

Small Business Administration (“SBA”) (Note 4).

On July 31, 2020, the Company entered into the August 2020 Financing (Note 5), pursuant to which the Company sold 56,333,334 common stock units each consisting of one share of common stock and one common stock warrant and 60,333,334 pre-funded units each consisting of one pre-funded warrant and one common stock warrant in a registered public offering.

The net proceeds from the transaction were $6,085,589.

The common stock warrants and prefunded warrants have an exercise price of $0.06 and $0.001, respectively.

The term of the common stock warrants is five years, and the pre-funded warrants are exercisable until all the pre-funded warrants have been exercised in full.

The Company is using the net proceeds of the offering for general corporate purposes, including working capital.

During March 2020, the Company approved a plan to defer up to 50% of the members of senior management’s compensation and 100% of the Board of Director and committee fees indefinitely.

Upon the closing of the August 2020 Financing, the Company’s Board of Directors determined that the Company had been sufficiently financed to pay the deferred salaries and fees, including a 10% retention bonus, to management and the Board in the aggregate amount of $293,078.

The Company plans to continue to pursue funding through public or private equity or debt financings, licensing arrangements, asset sales, government grants or other arrangements.

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If the Company raises additional funds by issuing equity securities, substantial dilution to existing stockholders would result.

Effective March 23, 2020, the Company approved a plan to defer 50% of senior management’s compensation indefinitely.

If the members of senior management accept the plan, the aggregate deferred compensation, together with a retention bonus of 10% of the amount being deferred will be payable to senior management when decided by the Board.

This measure, in conjunction with management’s plan to negotiate extended payment terms with its vendors and service providers, is intended to slow cash burn.

The Company’s Board plans on further assessing the financial condition of the Company to determine what additional measures, if any, will be implemented.

If the Company is unable to secure adequate additional funding, the Company may be forced to reduce spending further, liquidate assets where possible, suspend or curtail planned programs or cease operations.

On March 11, 2020, the World Health Organization declared the outbreak of a respiratory disease caused by a new COVID-19 as a “pandemic”.

In December 2019, a novel strain of coronavirus (“COVID-19”) emerged in Wuhan, China.

Since then, it has spread to the United States and infections have been reported around the world.

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread around the world and throughout the United States and Australia, where the Company has operations and conducts laboratory research and clinical studies.

In response to the outbreak, federal and state authorities in the United States have introduced various recommendations and measures to try to limit the pandemic, including travel restrictions, border closures, nonessential business closures, quarantines, self-isolations, shelters-in-place and social distancing.

The COVID-19 outbreak and the response of governmental authorities to try to limit it are having a significant impact on the private sector and individuals, including unprecedented business, employment and significant economic disruptions to the global financial markets.

These disruptions are likely to impact the Company’s ability to raise additional capital and obtain the necessary funds.

Notably, the Company relies on third party manufacturers to produce its product candidates.

The manufacturing of the active pharmaceutical ingredient of NB1111 is conducted in the United States.

The manufacturing of the active pharmaceutical ingredient of THCVHS is conducted in the United States.

Formulation of the eye drop for testing is also performed in the United States but can rely on regulatory-accepted excipients that can be sourced from countries outside the United States, such as China.

In lieu of the recent pandemic of a COVID-19, there could possibly be an impact on sourcing materials that are part of the eye drop formulation, as well as impacting volunteer and/or patient recruitment in Australia for clinical studies.

Therefore, the Company anticipates shifting its first-in-human studies of the lead drug candidate, NB1111, from the second half of 2020, to the 2021 timeframe.

Additionally, COVID-19 has caused significant disruptions to the global financial markets which could impact the Company’s ability to raise additional capital.

In connection with the recent pandemic of a COVID-19, there could possibly be an impact on sourcing materials that are part of the eye drop formulation, as well as impacting volunteer and/or patient recruitment in Australia for clinical studies.

The location of the proposed clinical trial is Melbourne, Australia and since the COVID-19 outbreak in that country, the city has experienced multiple health emergency lockdowns which have had a negative impact on the conduct and timelines of clinical studies.

Therefore, the Company has shifted its first-in-human studies of THCVHS from the second half of 2020 to the third quarter of 2021.

After considering the plans to alleviate substantial doubt, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.

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Actual results could differ from those estimates.

Certain reclassifications have been made to prior year amounts to conform to the current year’s presentation.

Such reclassifications had no net effect on the prior year’s total assets, total liabilities, total stockholders’ deficit, net loss, and cash flows.

Use of Estimates

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The Company’s operations are subject to a number of risks and uncertainties, including but not limited to, changes in the general economy, the size and growth of the potential markets for any of the Company’s product candidates, results of research and development activities, uncertainties surrounding regulatory developments in the United States and Australia, and the Company’s ability to attract new funding.

Cash and Cash Equivalents

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

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The Company has not experienced any losses on such accounts and does not believe it is exposed to any significant credit risk.

As of December 31, 2019, the Company has no cash equivalents.

Restricted Cash

A deposit of $4,538 and $4,512 as of December 31, 2019 and 2018, respectively, was restricted from withdrawal and held by a bank in the form of a certificate of deposit.

This certificate serves as collateral for payment of the Company’s credit cards.

As of December 31, 2020, and 2019, the Company has no cash equivalents.

Restricted cash on the balance sheet represents a certificate of deposit held by the Company’s bank as collateral for the Company’s credit cards.

Fair Value Measurements

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Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The carrying values of the Company’s financial instruments, with the exception of the Credit Agreement and derivative liabilities, including, cash, prepaid expenses, accounts payable, and other current liabilities approximate their fair value due to the short maturities of these financial instruments.

The derivative liabilities are valued on a recurring basis utilizing Level 3 inputs.

Advances under the Credit Agreement are not recorded at fair value.

However, fair value can be approximated and disclosed utilizing Level 3 inputs and independent third-party valuation techniques (See Note 3).

As of December 31, 2019 and 2018, the fair value of the advances under the Credit Agreement was $1,877,938 and $3,176,824, respectively.

The carrying amount of the liability at December 31, 2019 and 2018, was $387,070 and $1,360,960, respectively, and is included in Convertible multi-draw credit agreement - related party, net of discount in the Company’s Consolidated Balance Sheets.

Property and Equipment, Net

Property and equipment, net, consist primarily of computers and equipment.

Expenditures for additions, renewals and improvements are capitalized at cost.

Depreciation is computed on a straight-line method based on the estimated useful life of the related asset currently ranging from two to three years.

Maintenance and repairs that do not extend the life of assets are charged to expense when incurred.

When properties are disposed of, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is reported in the period the transaction takes place.

Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted cash flows expected to be generated by the asset.

If the carrying amount exceeds its estimated future undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value of the asset.

The carrying values of the Company’s financial instruments, with the exception of the Amended Credit Agreement and derivative liabilities, including, cash, prepaid expenses, accounts payable, the PPP loan and other current liabilities approximate their fair value due to the short maturities of these financial instruments.

The derivative liabilities are valued on a recurring basis utilizing Level 3 inputs (Note 3).

As of December 31, 2019, the fair value of the advances under the Amended Credit Agreement was $1,877,938, the carrying amount of the liability on December 31, 2019 was $387,070 and is included in Convertible multi-draw credit agreement - related party, net of discount in the Company’s Consolidated Balance Sheets.

As of December 31, 2020, the Company estimates the fair value of the Amended Credit Agreement to be materially consistent with the fair value estimate as of December 31, 2019, plus the non-convertible advances made in 2020.

This determination was based on the following considerations:

(i) the Company has not experienced any significant change in its credit worthiness or operations year over year, (ii) there have been no repayments or convertible draws, (iii) the facility is closer to maturity, and (iv) the embedded conversion feature on the convertible advances is out-of-the-money at the reporting date.

Information pertinent to estimating the fair value of the Amended Credit Agreement includes valuing the embedded conversion feature and considering the discounted cash flows of the interest and principal payments through maturity (Note 4).

The Company accounts for deferred income tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities, net operating loss carryforwards (the “NOLs”) and other tax credit carryforwards.

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The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date.

Any interest or penalties would be recorded in the Company’s Consolidated Statements of Comprehensive Income (Loss) in the period incurred.

Any interest or penalties would be recorded in the Company’s Consolidated Statements of Comprehensive (Loss) Income in the period incurred.

When necessary, the Company recognizes interest and penalties related to income tax matters in income tax expense.

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Due to the substantial doubt related to the Company’s ability to utilize its deferred tax assets, a valuation allowance for the full amount of the deferred tax assets has been established at December 31, 2020 and 2019.

As a result of this valuation allowance, there are no income tax benefits reflected in the accompanying Consolidated Statements of Comprehensive Income (Loss) to offset pre-tax losses.

As a result of this valuation allowance, there are no income tax benefits reflected in the accompanying Consolidated Statements of Comprehensive (Loss) Income to offset pre-tax losses.

The Company recognizes a tax benefit from uncertain tax positions when it is more likely than not (50%) that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position.

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or (c) variations inversely related to changes in the fair value of the issuer’s equity shares (for example, a written put option that could be net share settled).

Hybrid instruments meeting these criteria are not further evaluated for any embedded derivatives and are carried as a liability at fair value at each balance sheet date with a re-measurement reported in other (income) expense in the accompanying Consolidated Statements of Comprehensive Income (Loss).

When determining short-term vs.

Hybrid instruments meeting these criteria are not further evaluated for any embedded derivatives and are carried as a liability at fair value at each balance sheet date with a re-measurement reported in other expense (income) in the accompanying Consolidated Statements of Comprehensive (Loss) Income.

When determining the short-term vs.

long-term classification of derivative liabilities, the Company first evaluates the instruments’ exercise provisions.

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However, because of the unique provisions and circumstances that may impact the accounting for derivative instruments, the Company carefully evaluates all factors that could potentially restrict the instrument from being exercised or create a situation where exercise would be considered remote.

The Company re-evaluates its derivative liabilities at each reporting period end and make updates for any changes in facts and circumstances that may impact classification.

The Company re-evaluates its derivative liabilities at each reporting period end and makes updates for any changes in facts and circumstances that may impact classification.

Warrants Issued in Connection with Financings

The Company generally accounts for warrants issued in connection with debt and equity financings as a component of equity, unless the warrants include a conditional obligation to issue a variable number of shares or there is a deemed possibility that the Company may need to settle the warrants in cash.

For warrants issued with a conditional obligation to issue a variable number of shares or the deemed possibility of a cash settlement, the Company records the fair value of the warrants as a liability at each balance sheet date and records changes in fair value in other (income) expense in the Consolidated Statements of Comprehensive Income (Loss).

For warrants issued with a conditional obligation to issue a variable number of shares or the deemed possibility of a cash settlement, the Company records the fair value of the warrants as a liability at each balance sheet date and records changes in fair value in other expense (income) in the Consolidated Statements of Comprehensive (Loss) Income.

Debt Issuance Costs and Interest

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employee-related expenses, which include salaries and benefits for the personnel involved in the Company’s preclinical and clinical drug development activities;

facilities expense, depreciation and other allocated expenses;

facilities expense, and other expenses;

and equipment and laboratory supplies.

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Dividends - The dividend yield assumption is based on the Company’s history and expectation of paying no dividends in the foreseeable future.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources.

ASC 220 Comprehensive Income requires that an entity records all components of comprehensive income (loss), net of their related tax effects, in its financial statements in the period in which they are recognized.

For the years ended December 31, 2019 and 2018, the comprehensive income (loss) was equal to net income (loss).

Net Income (Loss) Per Share of Common Stock

Comprehensive (Loss) Income

Comprehensive (loss) income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources.

ASC 220 Comprehensive Income requires that an entity records all components of comprehensive (loss) income, net of their related tax effects, in its financial statements in the period in which they are recognized.

For the years ended December 31, 2020 and 2019, the comprehensive (loss) income was equal to net (loss) income.

Net (Loss) Income Per Share of Common Stock

The Company applies FASB ASC No.

260, Earnings per Share in calculating its basic and diluted net income (loss) per share.

Basic net income (loss) per share of common stock is computed by dividing net income (loss) available to common stockholders by the weighted-average number of shares of common stock outstanding for the period.

The diluted net loss per share of common stock is computed by giving effect to all potential common stock equivalents outstanding for the period determined using the treasury stock method.

260, Earnings per Share in calculating its basic and diluted net (loss) income per share.

Basic net (loss) income per share of common stock is computed by dividing net (loss) income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period.

The diluted net (loss) income per share of common stock is computed by giving effect to all potential common stock equivalents outstanding for the period determined using the treasury stock method.

For purposes of this calculation, options to purchase common stock, restricted stock subject to vesting, warrants to purchase common stock and common shares underlying convertible debt instruments were considered to be common stock equivalents.

In periods with a reported net loss, such common stock equivalents are excluded from the calculation of diluted net loss per share of common stock if their effect is anti-dilutive.

For additional information regarding the net income (loss) per share, see Note 7 “Net Income (Loss) per Share of Common Stock.”

For additional information regarding the net (loss) income per share, see Note 7 “Net (Loss) Income per Share of Common Stock.”

Recent Accounting Pronouncements

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):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity .

This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related EPS guidance for both Subtopics.

The ASU will be effective for annual reporting periods after December 15, 2023 and interim periods within those annual periods and early adoption is permitted in fiscal periods ending after December 15, 2020.

Upon implementation, the Company may use either a modified retrospective or full retrospective method of adoption.

The adoption of ASU 2020-06 will likely impact the way the Company calculates its (loss) earnings per share, result in expanded disclosures around convertible instruments and remove the requirement to assess and record beneficial conversion features.

The impact from adoption will depend on whether the Company elects to early adopt this ASU.

The Company currently plans to adopt the provisions of this ASU on the effective date.

However, it reserves the right to early adopt these provisions.

In December 2019, the FASB issued ASU No.

2019-12 Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes.

The Board issued this Update as part of its Simplification Initiative to improve areas of GAAP and reduce cost and complexity while maintaining usefulness.

2019-12, Income Taxes (Topic 740) :

Simplifying the Accounting for Income Taxes .

The Board issued this update as part of its Simplification Initiative to improve areas of GAAP and reduce cost and complexity while maintaining usefulness of the financial statements.

The main provisions remove certain exceptions, including the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

In addition, the amendments simplify income tax accounting in the areas such as income-based franchise taxes, eliminating the requirements to allocate consolidated current and deferred tax expense in certain instances and a requirement that an entity reflects the effect of enacted changes in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.

For public companies, the standard is effective for fiscal years beginning after December 15, 2019, and interim periods therein.

For public companies, the standard is effective for fiscal years beginning after December 15, 2020, and interim periods therein, with early adoption permitted.

The Company plans to adopt this ASU on the effective date of January 1, 2021.

The amendments in the update related to foreign subsidiaries will be applied on a modified retrospective basis, the amendments to franchise taxes will be applied on either a retrospective or modified retrospective basis and all other amendments will be applied on a prospective basis.

The Company is still evaluating the impact from adopting this standard.

However, because the Company’s deferred tax assets and liabilities are fully reserved, it does not expect a material impact from the adoption of this standard.

In November 2018, the FASB issued ASU No.

2018-08 Collaborative Arrangements (Topic 808) intended to improve financial reporting around collaborative arrangements and align the current guidance under ASC 808 with ASC 606 Revenue from Contracts with Customers .

The ASU affects all companies that enter into collaborative arrangements.

The ASU clarifies when certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 and changes certain presentation requirements for transactions with collaborative arrangement participants that are not directly related to sales to third parties.

For public companies, the standard is effective for fiscal years beginning after December 15, 2019, and interim periods therein.

Earlier adoption is permitted for any annual or interim period for which consolidated financial statements have not yet been issued.

The Company has not entered into any collaborative arrangements and therefore does not currently expect the adoption of this standard to have a material effect on its Consolidated Financial Statements.

The Company plans to adopt this ASU on the effective date of January 1, 2020.

Upon adoption, the Company will utilize the retrospective transition approach, as prescribed within this ASU.

Recently Adopted Accounting Standards

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815):

Accounting for Certain Financial Instruments with Down Round Features;

Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”).

Part I of this update addresses the complexity of accounting for certain financial instruments with down round features.

Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings.

Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option.

Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity , because of the existence of extensive pending content in the FASB Accounting Standards Codification.

This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests.

The amendments in Part II of this update do not have an accounting effect.

The Company adopted this ASU on the effective date of January 1, 2019.

The adoption of this standard using a retrospective cumulative-effect adjustment approach had no impact on the Company’s accumulated deficit.

The outstanding warrants issued in the Emerald Financing contain a down-round provision.

However, in the absence of the down-round provision, these warrants would still require liability accounting and be considered derivatives (See Note 3).

As such, the adoption of ASU 2017-11 on January 1, 2019, did not have an impact on the Company’s Consolidated Financial Statements and Notes thereto.

In February 2016, the FASB issued ASU No.

2016-02 Leases (Topic 842).

In January, July and December 2018, and in March 2019, the FASB issued additional amendments to the new lease guidance relating to transition and clarification.

This ASU requires most lessees to recognize right-of-use assets and lease liabilities and recognize expenses in a manner similar to current accounting standards.

For public companies, the standard is effective for fiscal years beginning after December 15, 2018 and interim periods therein.

The Company adopted this ASU on the effective date of January 1, 2019.

Pursuant to ASU 2018-11, issued in July 2018, the Company elected to use the effective date as of the date of application for transition.

Upon adoption, there was no cumulative effect recorded to the accumulated deficit, as the Company has no lease terms in excess of one year.

The Company has elected the short-term lease practical expedient under the ASU, which resulted in no change to the current recognition accounting under ASC 840.

Because the Company’s deferred tax assets and liabilities are fully reserved, it does not expect a material impact from the adoption of this standard.

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued ASU No.

2018-13 Fair Value Measurement (Topic 820) intended to improve the effectiveness of disclosures around fair value measurements in the notes to financial statements.

The ASU affects all entities that are required to make disclosures about recurring or nonrecurring fair value measurements.

The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits.

The Company early adopted certain provisions of this ASU upon issuance during the third quarter of 2018 and revised its disclosures to omit the disclosures removed by this ASU on a retrospective basis.

As provided by the ASU, the Company elected to delay adoption of the additional disclosures until January 1, 2020, which include the range and weighed average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty until their effective date.

Upon the effective date, the additional disclosures have been included on a prospective basis in the Company’s financial statements, as applicable.

Because much of this information was disclosed prior to adoption this guidance did not have a substantial impact to the Company's disclosures in the notes to its financial statements and had no impact on the Company’s consolidated financial statements.

Warrants and Derivative Liabilities

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2015 Common Stock Warrants

Common Stock Warrants to Series B Stockholders

2016 Common Stock Warrants to Service Providers

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2019 Common Stock Warrants

2020 Common Stock Warrants

2020 Common Stock Warrants to Placement Agent

2020 Pre-Funded Warrants

Total warrants vested and outstanding as of December 31, 2020

August 2020 Financing Warrants

In connection with the August 2020 Financing (Note 5), the Company issued 116,666,668 common stock warrants, 8,166,667 common stock warrants to the placement agent and 60,333,334 pre-funded warrants.

The warrants were equity classified at issuance and of the $6,939,667 in gross proceeds, the Company allocated $2,767,767 and $2,146,997 of the gross proceeds to the common stock warrants and pre-funded warrants on a relative fair value basis, respectively.

The remaining $2,024,903 was allocated to the common stock.

The warrants issued to the placement agent were valued at $261,333 and recorded as equity issuance costs within equity.

The warrants vested immediately and were valued utilizing the Black-Scholes option pricing model with the following assumptions:

Common Stock Warrants

Placement Agent Warrants

Dividend yield

Volatility factor

Risk-free interest rate

Expected term (years)

Underlying common stock price

2019 Common Stock Warrants

During the year ended December 31, 2019, the Company issued 8,000,000 fully vested common stock warrants to investors, in conjunction with the November 2019 Common Stock Offering discussed below (See Note 5).

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Underlying common stock price

On November 1, 2018, the Company issued 2,500,000 fully vested common stock warrants to Emerald Health Sciences, in conjunction with the first advance on the Credit Agreement discussed below (See Note 4).

The warrants are equity classified at issuance and the Company allocated $315,080 of the gross proceeds to the warrants on a relative fair value basis.

The proceeds allocated to the warrants was recorded as a discount to the November 1, 2018 advance and are being amortized over the term of the debt.

The warrants vested immediately and had an estimated fair value of $593,629 utilizing the Black-Scholes option pricing model with the following assumptions:

Dividend yield

Volatility factor

Risk-free interest rate

Expected term (years)

Underlying common stock price

2018 Emerald Financing Warrants

In January and February 2018, the Company issued an aggregate of 40,800,000 and 3,400,000 fully vested common stock warrants to Emerald Health Sciences and an accredited investor, respectively, in conjunction with the Emerald Financing discussed below (See Note 5).

The Company reviewed the warrants for liability or equity classification under the guidance of ASC 480-10, Distinguishing Liabilities from Equity , and concluded that these warrants should be classified as liabilities.

See the additional discussion below, Derivative Liabilities- Emerald Financing Warrant Liability .

On December 20, 2019, Emerald Health Sciences paid the aggregate exercise price of $4,080,000 in the form of a reduction of the corresponding amount of obligations outstanding under the Credit Agreement to exercise 40,800,000 Emerald Financing Warrants.

Derivative Liabilities

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Year Ended December 31, 2020

December 31, 2018, Fair Value of Derivative Liabilities

Fair Value of Derivative Liabilities Issued

Derivative Liabilities

Derivative Liabilities Issued

Fair value of

Reclassification of Derivatives to Equity or Extinguishment

December 31, 2019, Fair Value of Derivative Liabilities

Reclassification

of Derivatives

Derivative Liabilities

Emerald Multi-Draw Credit Agreement - compound derivative liability (1)

$ (160,567) *

Emerald Financing - warrant liability (2)

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Total derivative liabilities

$ (9,734,759 )

$ (6,238,265 )

Less, noncurrent portion of derivative liabilities

Current balance of derivative liabilities

*This amount has been included in the calculation of the extinguishment loss recorded in connection with the prepayment of the Emerald Credit Agreement as described in Note 4 below.

Year Ended December 31, 2019

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Fair Value of Derivative Liabilities Issued

Fair value of Derivative Liabilities**

Reclassification of Derivatives to Equity

Fair value of

Reclassification of Derivatives to Equity or Extinguishment

December 31, 2019, Fair Value of Derivative Liabilities

Emerald Multi-Draw Credit Agreement - compound derivative liability (1)

$ (160,567 )*

Emerald Financing - warrant liability (2)

Series B - warrant liability (3)

Emerald Convertible Promissory Note - conversion liability (4)

Series B Preferred Stock - conversion liability (5)

Total derivative liabilities

$ (9,734,759 )

$ (6,238,265 )

Less, noncurrent portion of derivative liabilities

Current balance of derivative liabilities

**The change in fair value of derivative liabilities for the year ended December 31, 2018, relate partially to the Company determining it had sufficient trading activity to utilize the actual volatility of the trading of the Company’s common stock as an input to the volatility assumption when computing the fair value of derivative liabilities.

The volatility assumption was updated as of October 1, 2018 to incorporate the Company’s own volatility with six similar companies to develop a blended average.

The Company had previously estimated the volatility assumption by averaging the volatility of six similar entities which had resulted in a lower volatility.

The increase in value of the volatility assumption has led to a higher valuation of the derivative liabilities as disclosed below.

*This amount has been included in the calculation of the extinguishment loss recorded in connection with the prepayment of the Emerald Credit Agreement as described in Note 4 below.

Emerald Multi-Draw Credit Agreement Compound Derivative Liability (1)

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The resulting difference between the estimated fair values in both scenarios is the estimated fair value of the compound derivative.

The fair value of the underlying debt facility is estimated by calculating the expected cash flows with consideration of the estimated probability of a change in control transaction, defined as an event of default by the agreement, and applying the expected default interest rate from the date of such default through maturity.

The fair value of the underlying debt facility was estimated by calculating the expected cash flows with consideration of the estimated probability of a change in control transaction, defined as an event of default by the agreement, and applying the expected default interest rate from the date of such default through maturity.

The expected cash flows are then discounted back to the reporting date using a benchmark market yield.

The conversion right component of the compound derivative is measured using a standard Black-Scholes model for each payment period.

Because Emerald Health Sciences would forgo the contingent interest if the contingent put option was exercised upon an event of default, the value ascribed to the contingent put option within the compound derivative is de minimis.

The conversion right component of the compound derivative was measured using a standard Black-Scholes Option Pricing model for each payment period.

On April 29, 2020, the Company entered into the Amended Credit Agreement which removed the change in control provision as an event of default for advances before and after the amendment.

As a result of the modification, the contingent interest feature component of the compound derivative is no longer required to be bifurcated as a derivative liability.

During the year ended December 31, 2020, the liability has been reduced to $0 through an adjustment to the change in fair value of derivative liabilities.

Emerald Financing Warrant Liability (2)

In January and February 2018, the Company issued 44,200,000 warrants to purchase common stock in conjunction with the Emerald Financing discussed above.

In January and February 2018, the Company issued 44,200,000 warrants to purchase common stock in conjunction with the Emerald Financing.

The warrants vest immediately and have an exercise price of $0.10 per share with a term of five years and are exercisable in cash or through a cashless exercise provision.

The warrants contain an anti-dilution protection feature provided to the investors if the Company subsequently issues or sells any shares of common stock, stock options, or convertible securities at a price less than the exercise price of $0.10.

The exercise price is automatically adjusted down to the price of the instrument being issued.

The warrants contained an anti-dilution protection feature that provided the investors with price protection if the Company subsequently issued or sold any shares of common stock, stock options, or convertible securities at a price less than the exercise price of $0.10.

In connection with the August 2020 Financing, this provision was waived, and the exercise price was permanently set to $0.10.

In addition, the warrants contain a contingent put option if the Company undergoes a subsequent financing that results in a change in control.

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With the assistance of a third party valuation specialist, the Company valued the warrant liabilities utilizing the Monte Carlo valuation method pursuant to the accounting guidance of ASC 820-10, Fair Value Measurement s.

On the closing dates, the Company estimated that the fair value of the warrants issued on January 19, 2018 and February 16, 2018 was $4,717,211 and $5,707,423, respectively.

The warrant liabilities were valued using Monte Carlo simulations conducted at the closing dates of January 19, 2018 and February 16, 2018 and at the balance sheet dates using the following assumptions:

The warrant liabilities were valued using Monte Carlo simulations conducted at the balance sheet dates using the following assumptions:

As of December 31,

Dividend yield

3 unchanged sentences

Underlying common stock price

Because fair value assigned to the warrants exceeded the proceeds received in the Emerald Financing, none of the consideration was allocated to common stock and the Company recorded an adjustment for the difference between the fair value of the warrant liabilities and the total proceeds received to other expense in the Consolidated Statements Comprehensive Income (Loss) for the year ended December 31, 2018 as follows:

Initial fair value of Emerald Financing Warrant Liability

proceeds from the Emerald Financing

Excess over proceeds adjustment

In addition, because the aggregate proceeds were allocated to the fair value of the Emerald Financing warrant liability, issuance costs totaling $137,192 were charged to other expense during the year ended December 31, 2018.

Series B Warrant Liability (3)

In conjunction with the Redeemable Convertible Series B Preferred Stock financing, the Company issued the 2015 Series B Financing Warrants originally exercisable at a price of $1.15 per share.

The warrants are exercisable in cash or through a cashless exercise provision and contain certain cash redemption rights.

The Series B warrants also had a “down-round” protection feature if the Company subsequently issued or sold any shares of common stock, stock options, or convertible securities at a price less than the current exercise price.

The down round provision was triggered and automatically adjusted down to $0.10 on December 28, 2017, after the Company entered into the Convertible Promissory Note (See Note 4) and again to $0.00 on January 19, 2018, as a result of the Emerald Financing (See Note 5).

The strike price for these warrants is now permanently reset.

However, because the remaining warrant holders still have certain cash redemption rights upon the occurrence of certain fundamental transactions, as defined in the Series B warrant agreements, the warrants continue to require liability classification.

Subsequent to the repricing that occurred as a result of the Emerald Financing, the warrants have been valued using a Black Scholes Merton Option Pricing Model.

To compute the fair value of the warrants, the Company utilized the following assumptions in the Black Scholes Merton Option Pricing Model for the periods indicated:

Dividend yield

Volatility factor

Risk-free interest rate

Expected term (years)

Underlying common stock price

In January 2018, 987,000 Series B warrants were exercised at a price of $0.10 resulting in cash proceeds to the Company of $98,700.

Prior to exercise, these Series B Warrants were adjusted to fair value using a Black Scholes Merton Option Pricing Model which considered the closing trading price on the exercise dates.

For the year ended December 31, 2019 and for the period from January 19, 2018 through December 31, 2018, 187,500 and 4,231,750 Series B warrants were exercised for no consideration.

Prior to exercise, these Series B Warrants were adjusted to fair value using a Black Scholes Merton Option Pricing Model which considered the closing trading price on the exercise dates.

Because the exercise price of these options had been reset to $0.00, the fair value derived from the valuation model approximated the market value of the Company’s common stock on the exercise dates.

Emerald Convertible Promissory Note Conversion Liability (4)

In connection with the Convertible Promissory Note (See Note 4), the Company bifurcated a conversion liability related to an embedded conversion feature with a down-round protection provision.

The Company valued the conversion liability pursuant to the accounting guidance of ASC 820-10, Fair Value Measurement s, as of the financing date of each closing utilizing the Black Scholes valuation model and the following assumptions:

In conjunction with the Redeemable Convertible Series B Preferred Stock financing, the Company issued the 2015 Series B Common Stock Warrants originally exercisable at a price of $1.15 per share.

The warrants were exercisable in cash or through a cashless exercise provision and contain certain cash redemption rights.

The Series B Common Stock Warrants also had a “down-round” protection feature if the Company subsequently issued or sold any shares of common stock, stock options, or convertible securities at a price less than the current exercise price.

The down round provision was triggered and automatically adjusted down to $0.10 on December 28, 2017, after the Company entered into the Convertible Promissory Note (See Note 4) and the strike price was permanently reset to $0.00 on January 19, 2018, as a result of the Emerald Financing.

However, because the remaining warrant holders still had certain cash redemption rights upon the occurrence of certain fundamental transactions, as defined in the Series B Common Stock Warrant agreements, the warrants continued to require liability classification.

After the Emerald Financing repricing occurred, the warrants were valued using a Black Scholes Option Pricing Model.

To compute the fair value of the warrants, the Company utilized the following assumptions in the Black Scholes Merton Option Pricing Model:

Dividend yield

3 unchanged sentences

Underlying common stock price

The fair value of the conversion liability on January 19, 2018 was $360,000.

In connection with the Emerald Financing discussed in Note 5 below, the Convertible Promissory Note was converted, and the conversion liability was extinguished with the debt.

Series B Preferred Stock Conversion Liability (5)

On August 20, 2015, in connection with the Redeemable Convertible Series B Preferred Stock financing, the Company bifurcated a conversion liability related to the down-round protection provided to the Series B investors.

The value of this embedded derivative was determined utilizing a “with and without” method by valuing the Series B Preferred Stock with and without the down-round protection.

During the first fiscal quarter of 2018, all the remaining Series B Preferred Stock was converted to common stock and as a result, the Series B conversion liability was reduced to zero.

The reduction of this liability totaling $6,715 was recorded to equity during the year ended December 31, 2018.

Convertible Debt - Related Party

The Company’s Convertible Debt with Emerald Health Sciences consists of the following:

During the year ended December 31, 2020, 312,500 Series B Common Stock Warrants with an intrinsic value of $26,563 were exercised for no consideration per share, which resulted in the issuance of 312,500 shares of common stock.

Prior to exercise, these Series B Common Stock Warrants were adjusted to fair value using a Black Scholes Merton Option Pricing Model which considered the closing trading price on the exercise dates.

Because the exercise price of these options was reset to $0.00, the fair value derived from the valuation model approximated the market value of the Company’s common stock on the exercise dates.

As of December 31, 2020, the remaining Series B Common Stock Warrants expired unexercised.

Multi-Draw Credit Agreement- Related Party

The Company’s Debt with Emerald Health Sciences consists of the following:

As of December 31,

Total principal value

Total principal value of convertible debt—related party

Unamortized debt discount

1 unchanged sentence

Carrying value of total convertible debt - related party

Less, noncurrent portion

Current convertible debt - related party

The Company’s interest expense consists of the following:

Interest expense - stated rate

Non-cash interest expense:

Amortization of debt discount

Amortization of transaction costs

Other interest expense

Multi-Draw Credit Agreement

Total principal value of non-convertible debt—related party

Total carrying value of advances under the multi-draw credit agreement

On October 5, 2018, the Company entered into the Credit Agreement with Emerald Health Sciences, a related party (See Note 11).

The Credit Agreement provides for a credit facility to the Company of up to $20,000,000 and is unsecured.

Advances under the Credit Agreement bear interest at an annual rate of 7% (payable quarterly in arrears) and mature on October 5, 2022.

At Emerald Health Sciences’ election, advances and unpaid interest may be converted into common stock at a fixed conversion price of $0.40, subject to customary adjustments for stock splits, stock dividends, recapitalizations, etc.

On April 29, 2020, the Company entered into the Amended Credit Agreement with Emerald Health Sciences, which amends and restates the Credit Agreement.

For all pre-existing and new advances, the Amended Credit Agreement removed the change in control as an event of default (See Note 3) and defers the quarterly payment of interest until the Company completes a capital raise of at least $5,000,000.

As of August 2020, interest is no longer being deferred as a result of the August 2020 Financing.

The amendments to the pre-existing advances were accounted for as a modification.

For all advances made after the Credit Agreement was amended, advances will be convertible at a reduced conversion price of $0.25 per share of Common Stock, unless Emerald Health Sciences provides notice that the advance will not be convertible.

For all outstanding advances, the Amended Credit Agreement provides for a credit facility to the Company of up to $20,000,000 and is unsecured.

Advances under the Amended Credit Agreement bear interest at an annual rate of 7% and mature on October 5, 2022.

At Emerald Health Sciences’ election, convertible advances and unpaid interest may be converted into common stock at the fixed conversion price of the underlying advance, subject to customary adjustments for stock splits, stock dividends, recapitalizations, etc.

As of December 31, 2020, the unused portion of the credit facility is $13,550,000.

The drawdowns are subject to approval by the Company’s Board, which is controlled by the directors of Emerald Health Sciences.

As such, we do not consider the facility available until advance requests are approved, drawn down and funded.

The Credit Agreement is still in place, however, there is no guarantee of continued funding.

The Credit Agreement provides for customary events of default which may result in the acceleration of the maturity of the advances in addition to, but not limited to, cross acceleration to certain other indebtedness of the Company or a change in control.

The Company does not consider the facility available until advance requests are approved, drawn down and funded.

The Amended Credit Agreement is still in place;

however, there is no guarantee of continued funding under the Amended Credit Agreement.

The Amended Credit Agreement provides for customary events of default which may result in the acceleration of the maturity of the advances in addition to, but not limited to, cross acceleration to certain other indebtedness of the Company.

In the case of an event of default arising from specified events of bankruptcy or insolvency or reorganization, all outstanding advances will become due and payable immediately without further action or notice.

If any other event of default under the Credit Agreement occurs or is continuing, Emerald Health Sciences may, by written notice, terminate its commitment to make any advances and/or declare all the advances with any other amounts payable due immediately.

If any amount under the Credit Agreement is not paid when due, such overdue amount shall bear interest at an annual default interest rate of the applicable rate plus 10%, until such amount is paid in full.

In connection with each advance under the Credit Agreement, the Company agreed to issue to Emerald Health Sciences warrants to purchase shares of common stock in an amount equal to 50% of the number of shares of common stock that each advance may be converted into.

The warrants have an exercise price of $0.50 per share, a term of five years and are immediately exercisable upon issuance.

The exercise price is subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events or upon any distributions of assets, including cash, stock or other property to the Company’s stockholders (See Note 3).

In accounting for each convertible advance and the warrants issued under the Credit Agreement, the Company allocates the proceeds between the debt host and the freestanding warrants on a relative fair value basis for each advance.

If any other event of default under the Amended Credit Agreement occurs or is continuing, Emerald Health Sciences may, by written notice, terminate its commitment to make any advances and/or declare all the advances with any other amounts payable due immediately.

If any amount under the Amended Credit Agreement is not paid when due, such overdue amount shall bear interest at an annual default interest rate of the applicable rate plus 10%, until such amount is paid in full.

In connection with each advance under the Amended Credit Agreement, the Company has agreed to issue to Emerald Health Sciences warrants to purchase shares of common stock in an amount equal to 50% of the number of shares of common stock that each advance may be converted into.

The warrants have a term of five years that are immediately exercisable upon issuance.

Under the Amended Credit Agreement, Emerald Health Sciences may issue notice that no warrants will be granted at the time of the advance request.

The warrants issued under the Credit Agreement have an exercise price of $0.50 per share and any warrants issued under the Amended Credit Agreement will have a reduced exercise price of $0.35 per share.

The exercise prices are subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events or upon any distributions of assets, including cash, stock or other property to the Company’s stockholders (See Note 3).

In accounting for each advance and the warrants issued under the Amended Credit Agreement, the Company allocates the proceeds between the debt host and the freestanding warrants on a relative fair value basis for each advance.

On the date of each advance, if the effective conversion rate of the debt is less than the market value of the Company’s common stock, the Company records a beneficial conversion feature as a discount to the debt and an increase to additional paid-in capital.

The debt discounts related to the warrants, beneficial conversion features and compound derivatives, if any, are being amortized over the term of the Credit Agreement using the effective interest rate method.

Amortization of the debt discount is recognized as non-cash interest expense and the compound derivatives related to the contingent interest feature and acceleration upon default provision are remeasured at fair value in subsequent periods in the Company’s Consolidated Balance Sheets.

On November 1, 2018, the initial advance under Credit Agreement was made for $2,000,000 and the Company issued 2,500,000 warrants (See Note 3).

In accounting for the convertible advances and warrants under the Credit Agreement, $1,684,920 of the proceeds was allocated to the debt and $315,080 was allocated to equity classified warrants.

The debt discounts related to the warrants, beneficial conversion features and compound derivatives, if any, are being amortized over the term of the Amended Credit Agreement using the effective interest rate method.

Amortization of the debt discount is recognized as non-cash interest expense and the compound derivatives related to the contingent interest feature and acceleration upon default provision were remeasured at fair value in subsequent periods in the Company’s Consolidated Balance Sheets.

On November 1, 2018, an initial advance was made for $2,000,000 and the Company issued 2,500,000 warrants with an exercise price of $0.50 per share (See Note 3).

In accounting for the convertible advance and warrants under the Credit Agreement, $1,684,920 of the proceeds was allocated to the debt and $315,080 was allocated to equity classified warrants.

A beneficial conversion feature of $90,080 and a compound derivative liability of $204,102 were also recorded.

During the year ended December 31, 2019, the Company initiated two advances under Credit Agreement, each in the amount of $2,000,000, for an aggregate principal amount of $4,000,000, and the Company issued an aggregate of 5,000,000 warrants to Emerald Health Sciences (See Note 3).

In accounting for the convertible advances and warrants issued under the Credit Agreement, an aggregate amount of $3,283,890 was allocated to the debt and $716,110 was allocated to equity classified warrants.

A beneficial conversion feature of $1,584,850 and compound derivative liabilities of an aggregate of $516,058 have been recorded (See Note 3).

Of the $516,058 in compound derivatives, $322,644 was recorded as other expense in the Consolidated Statements of Comprehensive Income (Loss) for the year ended December 31, 2019, as the value of the beneficial conversion feature exceeded the proceeds allocated to the third draw.

Aggregate financing costs of $63,007 incurred in connection with the Credit Agreement have been recorded as a discount to the debt host and are being amortized using the effective interest rate method and recognized as non-cash interest expense over the term of the Credit Agreement.

During the year ended December 31, 2019, the Company used $3,985,500 in proceeds from the exercise of the 2018 Emerald Financing Warrants (Note 3) to prepay a portion of the principal balance on the Credit Agreement.

In connection with the prepayment, the Company recorded an extinguishment loss of $725,425.

During the year ended December 31, 2019, the Company initiated two advances, each in the amount of $2,000,000, for an aggregate principal amount of $4,000,000, and the Company issued an aggregate of 5,000,000 warrants with an exercise price of $0.50 per share (See Note 3).

In accounting for the convertible advances and warrants, an aggregate amount of $3,283,890 was allocated to the debt and $716,110 was allocated to equity classified warrants.

A beneficial conversion feature of $1,584,850 and compound derivative liabilities of an aggregate of $516,058 were recorded (See Note 3).

Of the $516,058 in compound derivatives, $322,644 was recorded as other expense in the Consolidated Statements of Comprehensive (Loss) Income for the year ended December 31, 2019, as the value of the beneficial conversion feature exceeded the proceeds allocated to the third draw.

During the year ended December 31, 2019, the Company used $3,985,500 in proceeds from the exercise of the 2018 Emerald Financing Warrants to prepay a portion of the outstanding principal balance.

In connection with the prepayment, the Company recorded an extinguishment loss of $725,425 in the fourth quarter of 2019.

The extinguishment loss was calculated as the difference between the fair value of the consideration paid to extinguish the debt and carrying value of the debt host plus the related compound derivative liability.

For the years ended December 31, 2019 and 2018, the effective interest rate related to the Credit Agreement was 32.05% and 10.57%, respectively.

As of December 31, 2019, the unamortized debt discount will be amortized over a remaining period of 2.76 years.

The fair value of the underlying shares of the Credit Agreement was $657,231 at December 31, 2019.

During the year ended December 31, 2020, the Company effected a fourth and fifth advances in the amounts of $150,000 and $300,000, respectively.

Emerald Health Sciences has elected that the fourth and fifth advances will not be convertible into shares of the Company’s common stock and gave notice to the Company that no warrants will be issued in connection with the advances.

Aggregate financing costs of $63,007 have been incurred and are recorded as a discount to the debt host and are being amortized using the effective interest rate method and recognized as non-cash interest expense over the term of the Amended Credit Agreement.

For the years ended December 31, 2020 and 2019, the effective interest rate related to the convertible portion of the Amended Credit Agreement was 98.01% and 32.05%, respectively.

As of December 31, 2020, the unamortized debt discount on the convertible advances will be amortized over a remaining period of approximately 1.76 years.

As of December 31, 2020, the fair value of the shares underlying the convertible advances under the Amended Credit agreement was $201,450.

As of December 31, 2020, the if-converted value did not exceed the principal balance.

Secured Convertible Promissory Note

On December 28, 2017, the Company entered into a convertible Secured Promissory Note and Security Agreement with Emerald Health Sciences (the “Convertible Promissory Note”).

The Convertible Promissory Note provided for aggregate gross proceeds to the Company of up to $900,000 and was secured by all the Company’s assets.

Drawdowns on the Convertible Promissory Note were interest-bearing at an annual rate of 12% (compounding semi-annually), payable at maturity.

The Convertible Promissory Note matured upon the earlier of June 30, 2018 or upon a default event, as defined, and elected by Emerald Health Sciences.

At Emerald Health Sciences’ election, drawdowns and unpaid interest were convertible into common stock at a conversion price of $0.10, subject to a full-ratchet antidilution right.

The Convertible Promissory Note was automatically converted upon the occurrence of the private placement transaction with Emerald Health Sciences (the Emerald Financing) in January 2018.

The Company received proceeds of $500,000 on December 28, 2017, and on January 19, 2018 the Company received the remaining $400,000 in funding as it had satisfied the conditions required.

These conditions required receipt of conversion notices from all the existing Series B stockholders to convert their preferred shares to common stock.

Such conversions occurred in January and February of 2018.

On each financing date, the Company bifurcated a conversion liability from the Convertible Promissory Note related to the embedded conversion feature with a down-round protection provision (See Note 3).

This resulted in a conversion liability of $265,000 at the first financing date which was one trading day prior to December 31, 2017.

The second funding in January 2018 resulted in an additional conversion liability of $360,000.

The conversion liabilities were recorded as a discount to the debt at each draw down date and were being amortized to interest expense.

On January 19, 2018, in conjunction with the Emerald Financing (See Note 5), the Convertible Promissory Note was automatically converted into common stock at a conversion price of $0.10 per share for 9,000,000 shares of common stock.

Upon conversion, the debt and associated conversion liability were extinguished, resulting in a loss on extinguishment of $590,392 which was recorded to other expense for the year ended December 31, 2018.

For the year ended December 31, 2018, the effective interest rate related to the Convertible Promissory Note was 13.94%.

Stockholders’ Equity (Deficit) and Capitalization

On November 14, 2018, the Company amended its articles of incorporation to increase the number of authorized shares of common stock available for issuance to 500,000,000.

On April 24, 2020, the Company received funding from the PPP Loan Lender pursuant to the PPP of the CARES Act administered by the SBA for a principal amount of $116,700.

The PPP Loan matures on April 24, 2022 and bears interest at a rate of 1.00% per year.

Interest and principal are payable monthly commencing on the date the amount of forgiveness determined under section 1106 of the CARES Act is remitted to the Company, but in no event ten months after the last day of the covered period if the Company fails to apply for loan forgiveness.

The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties.

Funds from the PPP Loan may only be used by the Company for payroll costs, costs for continuing group healthcare benefits, mortgage interest payments, rent, utility and interest on any other debt obligations that were incurred before October 9, 2020.

All or a portion of the principal from the PPP Loan may be forgiven by the SBA and the PPP Loan Lender upon application by the Company within 60 days but not later than 120 days after loan approval and upon documentation of expenditures in accordance with the SBA requirements.

Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, and covered utilities during an eight-week period, or a longer period if elected by the Company, commencing on the date of loan approval.

For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess of $100,000, prorated annually.

Not more than 40% of the forgiveness amount may be for non-payroll costs.

Forgiveness is reduced if full-time headcount declines, or if salaries and wages of employees with salaries of $100,000 or less annually are reduced by more than 25%.

After approval of the forgiveness amount and deferral period, the PPP Loan Lender will provide the Company with written notification of re-amortization of the PPP Loan and the remaining balance.

Interest Expense

The Company’s interest expense consists of the following:

Related party interest expense – stated rate

PPP loan interest expense – stated rate

Non-cash interest expense:

Amortization of debt discount

Amortization of transaction costs

Stockholders’ Equity and Capitalization

August 2020 Financing

On July 31, 2020, the Company entered into a Securities Purchase Agreement with certain institutional investors for the issuance and sale of securities, with H.C.

Wainwright & Co., LLC acting as the placement agent, pursuant to which the Company sold 56,333,334 common units, each consisting of one share of common stock and one warrant to purchase one share of common stock, and 60,333,334 pre-funded units, each consisting of one pre-funded warrant to purchase one share of common stock and one warrant to purchase one share of common stock, in a registered public offering which closed on August 4, 2020 (the “August 2020 Financing”).

The common units and pre-funded units were sold at a price per unit of $0.06 and $0.059, respectively, for gross aggregate proceeds of $6,939,667.

The common stock warrants and prefunded warrants have an exercise price of $0.06 and $0.001, respectively.

The common stock warrants have a term of five years, and the pre-funded warrants are exercisable until all the pre-funded warrants have been exercised in full (Note 3).

In connection with the August 2020 Financing, the Company incurred issuance costs of $854,078, for net proceeds of $6,085,589.

Additionally, the Company issued warrants to purchase 8,166,667 shares of common stock to the placement agent, which represent 7% of the total shares of common stock and pre-funded warrants sold in the offering.

The placement agent warrants have an exercise price of $0.075 per share and a term of five years.

November 2019 Common Stock Offering

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Warrant Exercises

During the year ended December 31, 2019, Emerald Health Sciences exercised 40,800,000 2018 Emerald Financing Warrants with an intrinsic value of $4,284,000, which resulted in the issuance of 40,800,000 shares of common stock.

During the year ended December 31, 2020, the Pre-Funded Warrant holders exercised 48,533,334 warrants with an intrinsic value of $2,104,667, which resulted in the issuance of 48,533,334 shares of common stock.

During the year ended December 31, 2020, the Series B Warrant holders exercised 312,500 warrants with an intrinsic value of $26,563, which resulted in the issuance of 312,500 shares of common stock.

Emerald Financing

On January 19, 2018, the Company entered into a Securities Purchase Agreement pursuant to which the Company sold to Emerald Health Sciences 15,000,000 shares of common stock and a warrant to purchase 20,400,000 shares of common stock at an exercise price of $0.10 for aggregate gross proceeds of $1,500,000 (the “Emerald Financing”).

This transaction also resulted in the conversion of the $900,000 Convertible Promissory Note (Note 4).

As part of the transaction, the Company’s Board members, with the exception of Dr.

Brian Murphy, the Company’s CEO/CMO, tendered their resignation and Emerald Health Sciences appointed two new nominees to the Board.

The Securities Purchase Agreement also provides that in the case of a subsequent financing in which the purchase price is less than $0.10 per share, Emerald Health Sciences shall be issued additional shares in order to protect against anti-dilution.

The second closing under the Emerald Financing occurred on February 16, 2018, pursuant to which the Company issued and sold to Emerald Health Sciences 15,000,000 shares of the Company’s common stock, and a warrant to purchase 20,400,000 shares of common stock at an exercise price of $0.10 per share for a term of five years.

In addition, an accredited investor purchased 2,500,000 shares of common stock and a warrant to purchase 3,400,000 shares of common stock at an exercise price of $0.10 per share for a term of five years.

The Company received aggregate gross proceeds of $1,750,000 from the second closing.

In connection with the private placement, the Company incurred issuance costs of $154,092, of which $137,192 was allocated to the warrant liability and expensed during the period and $16,900 was recorded as a reduction to additional paid-in capital from the issuance of common stock.

Conversion of Preferred Stock

During the year ended December 31, 2018, all remaining Preferred Series B, D, and F shares were converted to common stock as follows:

For the year ended December 31, 2018, 2,833.55 shares of Series B Preferred stock were converted, resulting in the issuance of 28,385,000 shares of common stock.

For the year ended December 31, 2018, 200 shares of Series D Preferred stock were converted, resulting in the issuance of 2,000,000 shares of common stock.

For the year ended December 31, 2018, 2,000 shares of Series F Preferred stock were converted, resulting in the issuance of 20,000,000 shares of common stock.

Preferred Stock

The Company has 20,000,000 authorized shares of preferred stock, with a par value of $0.001 per share.

As of December 31, 2019, there were no shares of preferred stock issued and outstanding.

During the year ended December 31, 2018, all remaining Preferred Series B, D, and F shares that were previously issued and outstanding were converted to common stock.

During the year ended December 31, 2019, the Series B Common Stock Warrant holders exercised 187,500 warrants with an intrinsic value of $144,375, which resulted in the issuance of 187,500 shares of common stock.

Stock-Based Compensation

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In October 2018, the Company increased the share reserve under the 2014 Plan to equal 10% of the number of issued and outstanding shares of common stock of the Company.

In August 2020, the Company approved Amendment No.

2 to the 2014 Plan, which increased the share reserve by an additional 7,876,835 shares over the 10% of the number of issued and outstanding shares of common stock and removed certain restrictions on the number of shares of common stock and the amount of cash-based awards up to which participants of the 2014 Plan can receive in a calendar year.

The 2014 Plan authorizes the issuance of awards including stock options, stock appreciation rights, restricted stock, stock units and performance units to employees, directors, and consultants of the Company.

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Share pool increase

(26,400,000 )

Available as of December 31, 2020

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Restricted Stock Awards

During the year ended December 30, 2020, 643,501 restricted stock awards (“RSAs”) with a weighted average grant date fair value of $0.26 vested and were released from their service condition restriction.

As of December 31, 2020, there are no unvested RSA awards outstanding under the 2014 Plan.

There was no restricted stock award (“RSA”) activity under the Company’s 2014 Plan during the year ended December 31, 2019.

On February 28, 2018, in conjunction with the signing of the K2C separation agreement discussed in Note 11 below, Mr.

Lykos’ RSAs amounting to 325,000 shares vested immediately resulting in a Type III award modification and a credit to stock compensation of $98,042 for the year ended December 31, 2018 due to a lower fair value of those shares as of the modification date.

On May 25, 2018, in conjunction with the signing of her separation agreement, the former Nemus CFO, Ms.

Elizabeth Berecz’s RSA’s amounting to 350,000 shares vested immediately resulting in a Type III award modification and a credit to stock compensation of $97,183 for the year ended December 31, 2018 due to a lower fair value of those shares as of the modification date as compared to the fair value immediately prior to acceleration.

Awards Granted Outside the 2014 Plan

During the year ended December 31, 2020, 325,929 stock options with a weighted average exercise price of $0.25 were forfeited in connection with the separation and release of the Company’s former CFO.

As of December 31, 2020, an additional 869,144 options vested and outstanding with a weighted average exercise price of $0.25 were cancelled unexercised.

There was no option activity outside of the 2014 Plan during the year ended December 31, 2019.

On May 25, 2018, the Company entered into Stock Option Agreement with Douglas Cesario, CFO, granting 1,195,073 stock options with an exercise price equal to $0.245 and a grant date fair value of $200,772 or $0.26 per share based on the following assumptions estimated on the date of grant using the Black-Scholes option-pricing model:

Dividend Yield

Risk-free interest rate

Expected term (in years)

The options vested 25% on July 23, 2018, and the remaining 75% will vest 1/33 on each of the next 33 months thereafter.

Options will fully vest upon a triggering event, including a sale of the Company or a merger that results in a change of control.

At December 31, 2019, these options have a remaining contractual life of 8.57 years.

At December 31, 2019, 760,501 options are exercisable and have no intrinsic value.

At December 31, 2019, 1,195,073 options are vested and are expected to vest and have no intrinsic value.

The total fair value of stock options that vested during the years ended December 31, 2020 and 2019 were $18,252 and $54,756, respectively.

Restricted Stock Awards

On January 18, 2018, the Company entered into Restricted Stock Agreements with each of Dr.

Murphy, Elizabeth Berecz, CFO, and Cosmas N.

Lykos, the Company’s Founder granting 900,000, 700,000, and 900,000 shares of restricted common stock, respectively, with a fair value of $475,000.

These agreements were issued outside of the 2014 Omnibus Incentive Plan.

The restricted stock vests in equal 50% installments on the first and second anniversaries of the grant date, subject to continued employment with the Company through the applicable vesting date.

Each Restricted Stock Agreement provides that if an executive’s employment or service is terminated by the Company without cause, or is terminated by the grantee for good reason, then the executive shall be entitled to receive a cash severance payment equal to six months of their base compensation, payable in substantially equal installments during the six-month period following the separation along with accelerated vesting of all outstanding stock awards.

On February 28, 2018, in conjunction with the signing of the K2C separation agreement discussed in Note 8 below, Mr.

Lykos’ Restricted stock awards amounting to 900,000 shares became immediately vested resulting in a Type III award modification and stock compensation expense of $216,000 for the year ended December 31, 2018, due to an increase in the fair value of the award immediately before and after the modification date.

On May 25, 2018, in conjunction with the signing of her separation agreement discussed above, the Company’s former CFO, Ms.

Elizabeth Berecz’s Restricted stock awards amounting to 700,000 shares became immediately vested resulting in the recording of compensation expense of $184,800 for the year ended December 31, 2018, due to an increase in the fair value of the award immediately before and after the modification date.

The following is a summary of RSA activity outside of the Company’s 2014 Plan during the year ended December 31, 2020:

Average Grant

Date Fair Value

Unvested, December 31, 2019

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The Company recognizes stock-based compensation expense using the straight-line method over the requisite service period.

For the years ended December 31, 2019 and 2018, the Company recognized stock-based compensation expense of $680,455 and $674,961, respectively (including compensation expense for RSAs discussed above), which was recorded as a general and administrative expense in the Consolidated Statements of Comprehensive Income (Loss).

The Company recognized stock-based compensation expense, including compensation expense for RSAs discussed above, in its Consolidated Statements of Comprehensive (Loss) Income as follows:

Research and development

General and administrative

The total amount of unrecognized compensation cost was $688,410 as of December 31, 2020.

This amount will be recognized over a weighted-average period of 3.79 years.

Net Income (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 income (loss) per share computations:

Net (Loss) Income 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) income per share computations:

For the Year Ended December 31, 2020

(Denominator)

Income available to common stockholders

$ (6,560,699 )

Loss available to common stockholders

Effect of Dilutive Securities

Unvested restricted stock

Warrants – liability classified

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(Denominator)

$ (19,194,236 )

Basic and Diluted EPS

Loss available to common stockholders

Income available to common stockholders

Effect of Dilutive Securities

Unvested restricted stock

Warrants – liability classified

Loss available to common stockholders + assumed conversions

$ (8,198,787 )

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Common shares underlying convertible debt

The components of income (loss) before the income tax provision (benefit) consist of the following:

The components of (loss) income before the income tax provision consist of the following:

United States

$ (6,556,280 )

Pre-tax income (loss) from operations

Pre-tax (loss) income from operations

$ (6,559,099 )

Under the FASB’s accounting guidance related to income tax positions, among other things, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority.

An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

Additionally, the guidance provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company had no accrual for interest or penalties on the Company’s Balance Sheets at December 31, 2019 and 2018, and has not recognized interest and/or penalties in the Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019 or 2018.

The Company is subject to taxation in the United States and California.

The Company’s tax years for 2016 (federal) and 2015 (California) and 2019 (Australia) and forward are subject to examination by the United States, California and Australia tax authorities.

At December 31, 2019, the Company had federal and California NOLs aggregating $13,213,037 and $24,481,423, respectively, which, if not used, it will begin to expire from 2033 and the Company had federal NOLs that do not expire but utilization is limited to 80% of taxable income for any given tax year in the amount of $11,275,349.

The Company is subject to taxation in the United States, California and Australia.

The Company’s tax years for 2017 (federal), 2016 (California) and 2019 (Australia) and forward are subject to examination by the United States, California and Australia tax authorities.

However, to the extent allowed by law, the taxing authorities may have the right to examine periods where NOLs and credits were generated and carried forward and make adjustments up to the amount of the NOL and credit carryforwards.

The Company is not currently under examination by any jurisdiction.

At December 31, 2020, the Company had federal and California NOLs aggregating $30,475,657 and $30,310,672, respectively.

If not used, $13,213,037 of Federal NOLs and $30,310,672 of state NOLs will begin to expire in 2033.

$17,262,620 of federal NOLs will carry forward indefinitely subject to an 80% limitation against taxable income.

At December 31, 2020, the Company had Australia NOLs aggregating $43,349 which do not expire.

Utilization of the domestic NOL will be subject to a substantial annual limitation due to ownership change limitations that may have occurred, or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the Code), as well as similar state provisions.

At December 31, 2020, the Company had federal and California research credit carryforwards of approximately $76,632 and $40,528, respectively.

The federal research credit carry forwards will begin to expire in 2040, unless previously utilized and the California research credits will carry forward indefinitely.

The Company’s NOLs and research credit carryforwards are subject to a reserve.

Utilization of the domestic NOL will be subject to a substantial annual limitation due to ownership change limitations that may have occurred, or that could occur in the future, as required by Section 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code), as well as similar state provisions.

These ownership changes may limit the amount of NOLs that can be utilized annually to offset future taxable income and tax, respectively.

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Any limitation may result in expiration of a portion of the NOL before utilization.

The multiple ownership changes may have already occurred as the Company raised capital through the issuance of stock.

While the Company has not performed a Section 382 study, multiple ownership changes may have already occurred as the Company raised capital through the issuance of stock.

However, due to the existence of the valuation allowance for deferred tax assets, any potential change in ownership will not impact the Company’s effective tax rate.

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Current deferred tax assets/(liabilities):

Capitalized research and development costs

Research and development credits

Net operating loss

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As a result of this valuation allowance, there are no income tax benefits reflected in the accompanying statement of operations to offset pre-tax losses.

During the year ended December 31, 2020, the valuation allowance increased by $1,383,765.

The Tax Cuts and Jobs Act of 2017 subjects a U.S.

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The Company elects to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only.

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic.

The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021.

In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.

Due to the Company's history of net operating losses, the CARES Act is not expected to have a material impact on the Company's financial statements.

On April 22, 2020, when the Company entered into the PPP Loan with the PPP Loan Lender (Note 4).

In accordance with the Consolidated Appropriations Act, 2021 enacted on December 27, 2020, certain qualified expenses used with the funds of the PPP Loan are fully deductible for Federal income tax purposes.

Additionally, should the Company receive forgiveness of the PPP loan in the future, the amount will not be considered taxable for Federal income tax purposes.

An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

Additionally, the guidance provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

A reconciliation of the beginning and ending amounts of unrecognized tax positions are as follows:

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Gross increase - current period tax positions

Gross decrease – prior period tax positions

Unrecognized tax positions, end of year

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The Company does not expect any significant increases or decreases to the Company’s unrecognized tax positions within the next twelve months.

The Company had no accrual for interest or penalties on the Company’s Balance Sheets at December 31, 2020 and 2019 and has not recognized interest and/or penalties in the Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2020 and 2019.

Other Current Liabilities

Other current liabilities consist of the following:

As of December 31,

Accrued payroll liabilities

Accrued research and development costs

Accrued legal expense

Accrued board fees

Total other accrued liabilities

Significant Contracts - University of Mississippi

UM 5050 Pro-Drug and UM 8930 Analog Agreements

In July 2018, the Company renewed its ocular licenses for UM 5050, related to the pro-drug formulation of tetrahydrocannabinol (“THC”), and UM 8930, related to an analog formulation of cannabidiol (“CBD”).

UM 5050 Prodrug and UM 8930 Analog Agreements

In July 2018, the Company renewed its ocular licenses for UM 5050, related to the prodrug formulation of tetrahydrocannabinol (“THC”), and UM 8930, related to an analog formulation of cannabidiol (“CBD”).

On May 24, 2019, the ocular delivery licenses were replaced by “all fields of use” licenses for both UM 5050 and UM 8930 (collectively, the “License Agreements”).

Pursuant to the License Agreements, UM granted the Company an exclusive, perpetual license, including, with the prior written consent of UM, the right to sublicense, to intellectual property related to UM 5050 and UM 8930 for all fields of use.

Pursuant to the License Agreements, UM granted the Company an exclusive, perpetual license, including, with the prior written consent of UM, the right to sublicense, the intellectual property related to UM 5050 and UM 8930 for all fields of use.

The License Agreements contain certain milestone payments, royalty and sublicensing fees payable by the Company, as defined therein.

Each License Agreement provides for an annual maintenance fee of $75,000 payable on the anniversary of the effective date.

The upfront payment for UM 5050 is $100,000 and the upfront payment for UM 8930 is $200,000.

Additionally, there is also a $200,000 fee due within 30 days upon receipt of the first United States Patent and Trademark Office Notice of Allowance for UM 8930.

The Company made upfront payments for UM 5050 and UM 8930 of $100,000 and $200,000, respectively.

In addition, in March 2020, the Company was notified by the United States Patent and Trademark Office, that a notice of allowance was issued for the proprietary analog of cannabidiol, CBDVHS, under the UM 8930 License Agreement.

As a result, the Company was required to pay UM a fee of $200,000.

The milestone payments payable for each license are as follows:

$100,000 paid within 30 days following the submission of the first Investigational New Drug Application to the Food and Drug Administration or an equivalent application to a regulatory agency anywhere in the world, for a product;

$100,000 paid within 30 days following the submission of the first Investigational New Drug Application (“NDA”) to the Food and Drug Administration or an equivalent application to a regulatory agency anywhere in the world, for a product;

$200,000 paid within 30 days following the first submission of an NDA, or an equivalent application to a regulatory agency anywhere in the world, for each product that is administered in a different route of administration from that of the early submitted product(s);

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The Company may terminate each License Agreement upon 60 days’ written notice to UM.

As of December 31, 2019, none of the milestones under the license agreements have been met.

As of December 31, 2020, with the exception of the fee due for the notice of allowance for CBDVHS, none of the other milestones under these license agreements have been met.

UM 5070 License Agreement

In January 2017, the Company entered into a license agreement with UM pursuant to which UM granted us an exclusive, perpetual license, including the right to sublicense, to intellectual property related to a platform of cannabinoid-based molecules (“UM 5070”), to research, develop and commercialize products for the treatment of infectious diseases.

The license agreement culminates roughly one year of screening and target molecule identification studies especially focused on therapy-resistant infectious organisms like Methicillin-resistant Staphylococcus aureus (“MRSA”).

The Company paid UM an upfront license fee under the license agreement.

Under the license agreement, the Company is also responsible for annual maintenance fees that will be credited against royalties in the current fiscal year, contingent milestone payments upon achievement of development and regulatory milestones, and royalties on net sales of licensed products sold for commercial use.

In January 2017, the Company entered into a license agreement with UM pursuant to which UM granted the Company an exclusive, perpetual license, including the right to sublicense, to intellectual property related to a platform of cannabinoid-based molecules (“UM 5070”), to research, develop and commercialize products for the treatment of infectious diseases.

The Company paid UM an upfront license fee of $65,000 under the license agreement.

Under the license agreement, the Company is also responsible for annual maintenance fees of $25,000 that will be credited against any royalties incurred, contingent milestone payments upon achievement of development and regulatory milestones, and royalties on net sales of licensed products sold for commercial use.

The aggregate milestone payments due under the license agreement if all the milestones are achieved is $700,000 and the royalty percentage due on net sales is in the mid-single digits.

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As of December 31, 2020, none of the milestones under this license agreement have been met.

Commitments and Contingencies

Legal Matters

General Litigation and Disputes

From time to time, in the normal course of our operations, we 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 our operations or our financial position, liquidity or results of operations.

As of December 31, 2019, there were no pending or threatened lawsuits or claims that could reasonably be expected to have a material effect on the Company’s financial position or results of operations.

Government Proceedings

Like other companies in the pharmaceutical industry, we are subject to extensive regulation by national, state and local government agencies in the United States.

As a result, interaction with government agencies occurs in the normal course of our operations.

It is possible that criminal charges and substantial fines and/or civil penalties or damages could result from any government investigation or proceeding.

As of December 31, 2019, the Company had no proceedings or inquiries.

Change in Control Severance Plan

In February 2015, we adopted a change in control severance plan, in which our named executive officers participate, that provides for the payment of severance benefits if the executive’s service is terminated within twelve months following a change in control, either due to a termination without cause or upon resignation for a good reason (as each term is defined in the plan).

In either such event, and provided the executive timely executes and does not revoke a general release of claims against the Company, he or she will be entitled to receive:

(i) a lump sum cash payment equal to at least six months of the executive’s monthly compensation, plus an additional month for each full year of service over six years, (ii) Company-paid premiums for continued health insurance for a period equal to the length of the cash severance period or, if earlier, when executive becomes covered under a subsequent employer’s healthcare plan, and (iii) full vesting of all then-outstanding unvested stock options and restricted stock awards.

Related Party Matters

In June 2014, the Company’s U.S.

subsidiary entered into an independent contractor agreement with K2C, Inc.

(“K2C”), which is wholly owned by the Company’s former Executive Chairman and Co-Founder, Mr.

Lykos, pursuant to which the Company paid K2C a monthly fee for services performed by Mr.

Lykos for the Company.

The agreement expired on June 1, 2017, and was automatically renewed for one year pursuant to the terms of the agreement.

The monthly fee under the agreement was $10,000 and increased to $20,000 effective April 1, 2017.

In February 2018, the Company entered into a separation and release agreement with K2C, which provided for a lump sum payment of $180,000 and the immediate vesting of 900,000 shares of restricted common stock granted on January 18, 2018, 325,000 shares of restricted common stock granted on October 20, 2015, and 125,000 options granted on November 21, 2014, in exchange for a release of claims and certain other agreements.

During the year ended December 31, 2018, the Company recognized additional stock-based compensation expense of $112,270 for these restricted stock and option awards.

For the year ended December 31, 2019, no expense was incurred under this agreement.

For the year ended December 31, 2018, total expense incurred under this agreement was $220,000 (including the previously discussed lump sum payment).

Under the separation agreement, Mr.

Lykos was allowed to participate in the Company’s health, death and disability insurance plans for six months subsequent to K2C’s separation.

Emerald Health Sciences

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The Independent Contractor Agreement had an initial term of 10 years and specified compensation which was agreed upon between the Company’s Chief Executive Officer and Emerald Health Sciences’ Chairman, CEO and President on a month-to-month basis.

The Independent Contractor Agreement had an initial term of ten years and specified compensation to be agreed upon between the Company’s Chief Executive Officer and Emerald Health Sciences’ CEO on a month-to-month basis.

The fee due under this agreement was payable on a monthly basis.

Under this agreement, for the years ended December 31, 2019 and 2018, the Company incurred expenses of $542,000 and $550,000, respectively.

At December 31, 2019, the Company has accrued $10,000 in expense under this agreement.

Effective December 31, 2019, the Independent Contractor Agreement has been terminated.

On February 6, 2018, the Company entered into a Consulting Agreement with Dr.

Avtar Dhillon, the Chairman, Chief Executive Officer and President of Emerald Health Sciences.

The services under the Consulting Agreement included corporate finance and strategic business advisory services.

The Consulting Agreement had an initial term of one year and was renewable automatically unless terminated by either party.

The agreement specified an annual fee of $60,000, payable semi-monthly in installments, and included reimbursement for reasonable expenses incurred in the performance of the services.

Under the agreement, Dr.

Avtar Dhillon was also entitled to a discretionary annual bonus, payable 120 days after each fiscal year-end, to be determined by the Board upon its annual review.

Under this agreement, for the year ended December 31, 2018, the Company incurred $45,000.

The Consulting Agreement was canceled on October 5, 2018 in connection with the Company’s entry into the Credit Agreement with Emerald Health Sciences (See Note 4) and Dr.

Avtar Dhillon’s appointment as the Executive Chairman of the Company’s Board.

Effective December 31, 2019, the Independent Contractor Agreement was terminated.

As of December 31, 2020, and 2019, the Company has accrued $7,032 reimbursable expenses under the Independent Contractor Agreement which have yet to be paid.

Under this agreement, no expenses were incurred for the year ended December 31, 2020.

Under this agreement, for the year ended December 31, 2019, the Company incurred expenses of $542,000.

On December 17, 2019, Dr.

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In exchange for his services, Dr.

Dhillon will receive a monthly fee of $10,000, with (i) $5,000 paid each month and (ii) $5,000 accruing from the effective date and payable upon the Company’s completion of a material financing.

The Board will review the monthly rate paid to Dr.

On March 30, 2020, the Company and Dr.

Dhillon amended the Independent Contractor Services Agreement by agreeing to defer payment of 100% of Dr.

Dhillon’s consulting fees until the Board of Directors determined that the Company had been sufficiently financed to make such payments at which point the Company agreed to pay Dr.

Dhillon all of his accrued consulting fees, and a bonus of 10% of his accrued consulting fees, less applicable tax and other withholdings.

The deferral was paid concurrent with the August 2020 Financing.

Subsequent to the August 2020 Financing Dr.

Dhillon continues to receive a monthly fee of $10,000 per month for his services.

The Board reviews the monthly rate paid to Dr.

Dhillon within 90 days of the end of each fiscal year.

The Independent Contractor Services Agreement has an initial term of one year and will renew automatically thereafter unless terminated earlier by either party.

The Independent Contractor Services Agreement has an initial term of one year and automatically renews thereafter unless terminated earlier by either party.

Under this agreement, for the years ended December 31, 2020 and 2019, the Company incurred fees of $127,387 and $3,871, respectively.

As of December 31, 2020, the Company has accrued $10,000 in expense related to the Independent Contractor Services Agreement.

In addition, on August 10, 2020, Emerald Health Sciences, Inc.

transferred to Dr.

Avtar Dhillon 500,000 shares of the Company’s common stock at a deemed price of $0.10 in exchange for the cancellation of $50,000 of debt.

As of December 31, 2020, Jim Heppell and Punit Dhillon are board members of the Company and Emerald Health Pharmaceuticals, a subsidiary of Emerald Health Sciences, Inc.

As of December 31, 2020, Jim Heppell is also a board member of Emerald Health Sciences, Inc.

The Company’s CEO, Punit Dhillon also served as a board member of Emerald Health Sciences, Inc.

until he tendered his resignation from such board on August 10, 2020.

The Company shares the same office location as Emerald Health Pharmaceuticals.

However, the Company’s workforce is remote, there is no written rental agreement with Emerald Health Pharmaceuticals, and no rent is being charged.

On August 10, 2020, Emerald Health Sciences, Inc.

extinguished debt of $186,667 by transferring 1,566,666 shares of the Company’s common stock at a deemed price of $0.10 per share to certain officers, employees and directors of the Company.

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.

As of December 31, 2020, there were no pending or threatened lawsuits or claims that could reasonably be expected to have a material effect on the Company’s financial position or results of operations.

Subsequent Events

In March 2020, the Company was notified by the United States Patent and Trademark Office, that a notice of allowance has been issued for the proprietary analog of cannabidiol, CBDVHS, under the UM 8930 License Agreement.

As a result, the Company is required to pay UM a fee of $200,000 within 30 days from when the notice was received (Note 9).

Refer to Note 1 for disclosure of the salary deferral program that was put in place during March 2020.

Emerald Health Biotechnology España, S.L.U

In January 2021, the Company entered into a Collaborative Research Agreement with Emerald Health Biotechnology España, S.L.U, a subsidiary of Emerald Health Research, Inc.

which is 100% owned by Emerald Health Sciences.

Under the agreement, Emerald Health Biotechnology España, S.L.

will provide research and development services pursuant to an agreed upon project plan for the research and development of CBDVHS.

The term of the agreement is initially for a one-year period.

Payment for services rendered will be based on time and materials billable at reasonable market rates.

Warrant Exercises

From January 1, 2021 through February 23, 2021 11,800,000 pre-funded warrants were exercised in exchange for 11,800,000 shares of common stock for gross proceeds of $11,800.

From January 1, 2021 through February 23, 2021 50,133,334 common stock warrants were exercised in exchange for 50,133,334 shares of common stock for gross proceeds of $3,008,000.

Increase to Authorized Shares of Capital Stock

On February 5, 2021, the Company increased its authorized shares of common and preferred stock to 5,000,000,000 and 50,000,000, respectively.

The following exhibits are filed with this Annual Report on Form 10-K.

Exhibit Number

Description of Exhibit

Articles of Incorporation of Registrant, as amended

Amendment to the Articles of Incorporation of the Registrant (28)

Bylaws of Registrant (1)

Amended and Restated Bylaws of Registrant

Certificate of Designation of the Relative Rights and Preferences of the Series B Preferred Stock filed with the Secretary of State of Nevada on August 19, 2015 (4)

15 unchanged sentences

Form of Warrant (34)

Form of Common Warrant (38)

Form of Pre-Funded Warrant (38)

Nemus Bioscience, Inc.

62 unchanged sentences

Avtar Dhillon.

Amended and Restated Multi-Draw Credit Agreement, dated April 29, 2020, by and between Emerald Bioscience, Inc.

and Emerald Health Sciences, Inc.

Sciences, Inc.

Separation and Release Agreement, dated April 29, 2020, between Emerald Bioscience, Inc.

and Douglas Cesario (37)

Form of Securities Purchase Agreement, dated as of July 31, 2020, between the Company and certain purchasers set forth in the signature page thereto (38)

Separation and Release Agreement, dated August 7, 2020, by and between Emerald Bioscience, Inc.

and Brian Murphy (39)

Employment Agreement, dated August 10, 2020, by and between Emerald Bioscience, Inc.

and Punit Dhillon (39)

Amendment No.

2 to 2014 Omnibus Incentive Plan (39)

Collaborative Research Agreement, dated January 2021, by and between Skye Bioscience, Inc.

and Emerald Health Biotechnology España, S.L.,

Subsidiaries of the Registrant (2)

1 unchanged sentence

Certification of Principal Executive Officer, pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934

Certification of Principal Financial Officer, pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934

Certification of Principal Financial and Accounting Officer, pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934

Certification of Principal Executive Officer, pursuant to 18 U.S.C.

Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Certification of Principal Financial Officer, pursuant to 18 U.S.C.

Certification of Principal Financial and Accounting Officer, pursuant to 18 U.S.C.

Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

2 unchanged sentences

XBRL Taxonomy Calculation Linkbase Document 101.def†† XBRL Taxonomy Definition Linkbase Document 101.lab†† XBRL Taxonomy Label Linkbase Document

101.pre†† XBRL Taxonomy Presentation Linkbase Document

____________ (1) Included as exhibit to our Registration Statement on Form S-1 filed on January 30, 2013

XBRL Taxonomy Presentation Linkbase Document

Included as exhibit to our Current Report on Form 8-K filed on November 3, 2014.

23 unchanged sentences

Included as exhibit to our Current Report on Form 8-K filed on October 12, 2018.

(27) Included as exhibit to our Quarterly Report on Form 10-Q filed on November 14, 2018.

(28) Included as exhibit to our Current Report on Form 8-K filed on November 16, 2018.

Included as exhibit to our Current Report on Form 8-K filed on March 4, 2019.

Included as exhibit to our Annual Report on Form 10-K filed on March 14, 2019.

Included as exhibit to our Current Report on Form 8-K filed on May 29, 2019.

4 unchanged sentences

Included as exhibit to our Current Report on Form 8-K filed on December 20, 2019.

Included as exhibit to our Annual Report on Form 10-K filed on March 14, 2019.

Included as exhibit to our Current Report on Form 8-K filed on April 29, 2020.

Included as exhibit to our Current Report on Form 8-K filed on August 5, 2020

Included as exhibit to our Current Report on Form 8-K filed on August 12, 2020

* Filed Herewith

5 unchanged sentences

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Emerald Bioscience, Inc.

Skye Bioscience, Inc.

a Nevada corporation

March 1, 2021

Chief Executive Officer, Director

/s/ Punit Dhillon

Punit Dhillon

Chief Executive Officer, Chairman

(Principal Executive Officer)

March 1, 2021

/s/ Doug Cesario

Chief Financial Officer

/s/ Richard Janney

Richard Janney

Interim Principal Accounting Officer

(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Punit Dhillon

March 1, 2021

Chief Executive Officer, Director

Punit Dhillon

Chief Executive Officer, Chairman

(Principal Executive Officer)

/s/ Doug Cesario

/s/ Richard Janney

March 1, 2021

Chief Financial Officer

Richard Janney

Interim Principal Accounting Officer

(Principal Financial and Accounting Officer)

/s/ Punit Dhillon

/s/ Margaret Dalesandro

March 1, 2021

Punit Dhillon

Margaret Dalesandro

/s/ Jim Heppell

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures