Skye Bioscience, Inc. annual report, FY2019

Business context and reporting period

This is Emerald Bioscience, Inc.’s Form 10-K for the fiscal year ended December 31, 2019, filed March 20, 2020. The request metadata names Skye Bioscience, but the filing identifies the registrant as Emerald Bioscience; confirm the intended company and filing. Emerald is an early-stage cannabinoid therapeutics developer, working principally under licenses from the University of Mississippi (UM). It had no product revenue and its candidates remained in research or preclinical development.

Financial performance and liquidity

• 2019 net income was driven mainly by a $9.73 million noncash gain from a decrease in derivative liabilities, not product operations. Basic EPS was $0.01; diluted EPS was a loss of $0.05 because assumed conversions affected the diluted calculation.
• Cash was $1.83 million at year-end, versus $1.85 million in 2018; cash and restricted cash totaled $1.83 million. The filing reports approximately $667,000 cash as of its filing date.
• Year-end total assets were $2.00 million, total liabilities $1.45 million, and stockholders’ equity $0.55 million, compared with a $15.56 million equity deficit in 2018. The large year-over-year change included substantial derivative-liability remeasurement and financing effects.
• Related-party credit agreement principal was $2.01 million at year-end; its balance-sheet carrying value, after discounts, was $0.39 million. The facility bears 7% interest, matures October 2022, and is convertible at $0.40 per share. Although up to $14 million remained undrawn, advances require board approval, and the filing says future funding is not assured.
• No gross margin is meaningful because the company reported no revenue. The auditor issued an unmodified opinion but included a going-concern explanatory paragraph; management also concluded substantial doubt existed about the company’s ability to continue as a going concern.

Material changes versus the prior period

• R&D expense rose $1.91 million, primarily reflecting expanded UM licenses, manufacturing and formulation work, regulatory preparation, and increased preclinical and clinical-readiness activity. G&A was broadly unchanged.
• The company reported a $19.19 million loss in 2018 and $1.05 million income in 2019, chiefly because derivative-liability fair-value changes moved from a large expense to a large noncash gain.
• Operating cash use increased by approximately $2.08 million. Financing activities provided $6.00 million net in 2019, including a registered offering and related-party financing activity; cash and restricted cash nevertheless declined slightly over the year.
• In May 2019, the UM 5050 THC prodrug and UM 8930 CBD analog licenses were expanded from ocular use to all fields of use. The company changed its name from Nemus Bioscience to Emerald Bioscience in March and formed an Australian subsidiary in August.

Outlook, commentary, and principal risks

• NB1111, the lead glaucoma candidate, showed preclinical IOP-lowering results, including statistical superiority to latanoprost in a rabbit model. NB2222 remained preclinical; NB3111 was in research for MRSA. These are early-stage findings, not evidence of clinical efficacy.
• The company planned first-in-human NB1111 studies in Australia, initially targeting the second half of 2020, but expected to defer them to 2021 because of COVID-19-related supply and patient-recruitment risks. SAD/MAD studies were planned, with later development dependent on safety and efficacy results.
• Management said additional financing was needed in the near term and that, without funding in the second quarter of 2020, available cash would not meet obligations. It planned to seek financing and slow cash use; effective March 23, 2020, senior management was to defer 50% of compensation, with a 10% retention bonus on deferred amounts, subject to board determination.
• Key risks include financing and dilution, dependence on UM and related-party lender Emerald Health Sciences, potential loss of licenses, preclinical and regulatory failure, controlled-substance requirements, third-party manufacturing and clinical-trial dependence, COVID-19 disruption, and thin OTCQB trading. THCVHS remained Schedule I; the DEA determined CBDVHS was not a controlled substance.
• The filing reports no material pending litigation and no material off-balance-sheet arrangements. Management reported effective disclosure controls and internal control over financial reporting as of year-end; the auditor did not provide an internal-control attestation.

Important facts for investors to verify

1. Confirm the registrant identity: this filing is for Emerald Bioscience, not a company named Skye Bioscience.
2. Verify current cash, near-term obligations, cash burn, and whether financing was obtained after the filing; the reported filing-date cash was about $667,000 and going-concern doubt was explicit.
3. Confirm whether Emerald Health Sciences funded any further credit advances, and reconcile outstanding principal, discounts, conversion rights, and related-party terms.
4. Check whether NB1111’s planned 2021 first-in-human studies began, and review trial registration, regulatory status, enrollment, safety, and results.
5. Assess the effect of the $200,000 UM fee triggered by the March 2020 CBDVHS patent notice of allowance, along with license milestones, royalties, and maintenance obligations.
6. Review subsequent share issuance, warrants, options, and ownership concentration for dilution and control implications; the filing reported 183.2 million shares outstanding on March 16, 2020.