Business context and reporting period
Quarterly report for the three and six months ended June 30, 2019, filed August 9, 2019. The filing is for Emerald Bioscience, Inc., formerly Nemus Bioscience—not Skye Bioscience, Inc. Emerald described itself as a pre-revenue biopharmaceutical company developing cannabinoid-based therapeutics under University of Mississippi licenses.
Key financial metrics
| Metric | Q2 2019 / June 30, 2019 | Comparable period / prior year-end |
|---|---|---|
| Revenue | None to date | None |
| Operating expenses | $1.771 million for Q2; $3.286 million for six months | Q2 2018: $1.080 million; six months 2018: $2.332 million |
| Operating loss | $1.771 million for Q2; $3.286 million for six months | Q2 2018: $1.080 million; six months 2018: $2.332 million |
| Net income (loss) | $15.905 million for Q2; $1.131 million for six months | Q2 2018: $(2.662) million; six months 2018: $(10.876) million |
| Operating cash flow | $(3.036) million for six months | Six months 2018: $(2.113) million |
| Cash | $2.808 million | $1.853 million at December 31, 2018 |
| Total assets / liabilities | $3.080 million / $14.721 million | $1.957 million / $17.519 million at December 31, 2018 |
| Debt and liquidity | $6.0 million principal under related-party credit facility; $3.102 million carrying value net of discount. Working capital deficit: $8.026 million. | $2.0 million principal at December 31, 2018 |
No meaningful revenue margin is available because the company had no revenue. Q2 and first-half 2019 net income primarily reflected noncash gains from lower fair value of derivative liabilities: $17.972 million for Q2 and $5.151 million for six months. These gains do not reflect operating profitability; operating losses continued.
Material changes versus prior comparable period
- Operating expenses rose 64% in Q2 year over year, mainly because research and development expense increased to $688,041 from zero. Six-month R&D rose to $1.009 million from $25,000, reflecting expanded licensing, contract research, regulatory and manufacturing work.
- Six-month operating cash use increased to $3.036 million from $2.113 million. Financing provided $3.991 million net during the first half, from $4.0 million in credit-facility advances.
- Reported net results shifted from losses to income, primarily because derivative fair-value movements swung favorably. The six-month 2018 loss also included a $7.175 million initial warrant valuation charge, financing costs and a debt-extinguishment loss.
- Cash increased from year-end, but the company remained in a substantial working-capital and stockholders’ deficit. Total derivative liabilities were $11.179 million at June 30, 2019.
Outlook, management commentary, risks and unusual items
- Going concern: Management said available funds would not be sufficient to meet obligations within one year without additional funding; the filing states that substantial doubt exists about the company’s ability to continue as a going concern. Management anticipated continued losses and negative operating cash flows.
- Financing: The related-party facility with Emerald Health Sciences provides up to $20 million, at 7% interest, maturing October 5, 2022; $6 million had been drawn and $14 million remained undrawn, subject to board approval. The lender can elect to convert advances and unpaid interest at $0.40 per share, subject to adjustments. The filing also notes a Form S-1 filed June 4, 2019 that was not yet effective; there was no assurance an offering would raise capital.
- Development: Management said NB1111 was being advanced toward first-in-human glaucoma studies (Phase 1b-2a). It reported preclinical findings, including IOP-lowering results in a rabbit model, and described further research for NB2222 and NB3111. These are development updates, not evidence of clinical efficacy or approval.
- Licenses and manufacturing: May 2019 agreements expanded UM 5050 and UM 8930 licenses from ocular use to all fields of use, with upfront, milestone, royalty and sublicensing obligations. After quarter-end, Emerald changed the THCVHS manufacturer to Noramco, with a $257,800 upfront payment plus further payments on shipment.
- Key risks: Need for additional capital; potential dilution; early-stage research and regulatory uncertainty; reliance on the University of Mississippi and external manufacturers, researchers and consultants; and possible reductions, delays or cessation of programs if funding is unavailable. Derivative valuations use significant Level 3 estimates and can materially affect reported earnings.
- Management reported disclosure controls were effective at a reasonable assurance level and no material changes in internal control over financial reporting during the quarter. No material legal-proceeding developments or changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing names Emerald Bioscience, Inc., while the request metadata names Skye Bioscience, Inc.
- Assess cash runway and near-term obligations against the $2.808 million cash balance, $8.026 million working-capital deficit and going-concern warning.
- Verify the availability and conditions for further related-party facility draws, including board approval, conversion terms, interest, and the lender’s influence.
- Separate operating performance from derivative fair-value gains when evaluating the reported Q2 and first-half net income.
- Track the effectiveness and terms of the proposed Form S-1 offering, potential dilution, and actual progress and funding needs for the development programs.
- Review license payment obligations and the timing, costs and execution risks associated with Noramco manufacturing and planned clinical development.