Business context and reporting period
The filing is Nemus Bioscience, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2018. The request metadata names Skye Bioscience, Inc.; that does not match the registrant named in the filing and should be verified. Nemus is a pre-revenue biopharmaceutical company developing cannabinoid-based therapeutics under licenses and agreements with the University of Mississippi.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 or prior period |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $25,000 | $92,100 |
| General and administrative expense | $1,226,361 | $1,288,053 |
| Total operating expenses / operating loss | $1,251,361 | $1,380,153 |
| Net loss | $8,213,793 | $1,283,218 |
| Net cash used in operating activities | $1,053,162 | $816,405 |
| Cash and cash equivalents at period-end | $2,945,312 | $259,955 at December 31, 2017 |
No gross profit or meaningful operating margin is reported because the company had no revenue. Q1 net loss included substantial financing-related and fair-value charges, notably a $7,174,634 charge for Emerald warrant liability fair value in excess of financing proceeds, a $590,392 loss on extinguishment of convertible debt, and other warrant and conversion-right remeasurement items. The filing reports total non-operating expense of $6,959,332. These items materially widened the net loss despite lower operating expenses.
Cash increased primarily from $3,250,000 of equity financing proceeds and $400,000 of bridge-loan funding received during the quarter. Operating cash use was $1,053,162. Current liabilities were $322,698; total liabilities were $8,912,170, including $8,589,472 of warrant liabilities. The $900,000 Emerald bridge loan was converted into common stock in January; no convertible debt remained at March 31. Common shares outstanding were 132,414,079 at quarter-end and 132,601,579 as of May 10.
Material changes versus the prior comparable period
- Operating expenses declined 9% year over year, chiefly as research and development spending fell to $25,000; management attributed this to limited cash availability. General and administrative costs also decreased modestly.
- Net loss rose to $8.2 million from $1.3 million, mainly because of non-cash warrant and financing accounting charges and the bridge-loan extinguishment loss.
- Cash and cash equivalents rose from $259,955 at year-end 2017 to $2.9 million, following Emerald-led financings and bridge funding.
- Emerald’s January and February financings resulted in a change of control, new board appointments, and issuance of 44.2 million warrants at a $0.10 exercise price. The Emerald warrants are liability-classified and subject to remeasurement.
- All remaining Series B, D, and F preferred shares converted to common stock during the quarter. The company also issued shares through warrant exercises, including exercises of Series B warrants at a reset exercise price of zero.
Outlook, risks, contingencies, and unusual items
Management expects continuing losses and spending on drug-candidate development, preclinical work, public-company costs, and potential hiring. The filing states that, without additional funding, the company will not have sufficient funds to meet obligations within one year after the financial statements were issued; management identifies substantial doubt about the company’s ability to continue as a going concern. It plans to seek equity or debt financing, collaborations, licensing arrangements, asset sales, grants, or other funding, but gives no assurance of availability. Additional equity could substantially dilute existing shareholders.
Key business risks include early-stage development and regulatory uncertainty; dependence on the University of Mississippi and third-party providers; the need to protect intellectual property; and the need for substantial additional capital. The Emerald warrants and preferred-stock terms include anti-dilution, redemption, and participation provisions that may affect future financing, cash needs, and dilution. License agreements carry annual fees, royalties, patent-cost reimbursements, and potential milestone payments; disclosed aggregate milestones are $2.1 million for UM 5050, $1.4 million for UM 8930, and $0.7 million for UM 5070, if achieved.
The company is pursuing arbitration over a separate 2017 Series E financing agreement and related guarantee, seeking to enforce a stated $20 million commitment. The purchaser and guarantor failed to fund; no recovery is assured. The filing reports no other material pending or threatened claims. Subsequent events include the CFO’s planned May 2018 departure, severance and accelerated vesting, and appointment of a replacement CFO.
Important facts for investors to verify
- Confirm the registrant and filing identity: the supplied metadata says Skye Bioscience, while the 10-Q identifies Nemus Bioscience, Inc.
- Assess cash runway and financing needs against the going-concern warning, cash balance, and quarterly operating cash use.
- Review the valuation assumptions and accounting classification of the $8.6 million warrant liability, including the substantial non-cash charge and possible future remeasurement volatility.
- Evaluate potential dilution from 51.4 million warrants outstanding, anti-dilution provisions, and the quarter’s preferred-stock conversions.
- Track progress and funding requirements for the University of Mississippi-licensed programs, and the outcome and collectability of the disputed $20 million Series E financing claim.