NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Business Activities
Nature of Operations
Skye Bioscience, Inc. (the “Company”) was initially incorporated in Nevada on March 16, 2011 as Load Guard Logistics, Inc. On October 31, 2014, the Company closed a reverse merger transaction (the “Merger”) pursuant to which Nemus, a California corporation (“Nemus Sub”), became the Company’s wholly owned subsidiary, and the Company assumed the operations of Nemus Sub. Nemus Sub was incorporated in the State of California on July 17, 2012. On November 3, 2014, the Company changed its name to Nemus Bioscience, Inc. 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”), 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 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 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. The primary purpose of EMBI Australia is to conduct clinical trials for the Company’s product candidates.
On December 17, 2019, Dr. Avtar Dhillon resigned as the Chairman of the Company’s Board and the Company entered into a Board Observer Agreement with Emerald Health Sciences. Refer to Note 11 - Related Party Matters for additional information.
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 away from potentially being able to do so.
Liquidity and Going Concern
The Company has incurred operating losses and negative cash flows from operations since inception and as of December 31, 2020, had an accumulated deficit of $38,733,981. 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, 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.
On October 5, 2018, the Company entered into a Multi-Draw Credit Agreement (the “Credit Agreement”) with Emerald Health Sciences (See Note 4). 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. However, the Company cannot provide any assurances that such additional funds will be available on reasonable terms, or at all. If the Company raises additional funds by issuing equity securities, substantial dilution to existing stockholders would result.
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 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 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.
2. Summary of Significant Accounting Policies
Basis of Presentation
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and the accompanying notes. Actual results could differ from those estimates.
Use of Estimates
The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates. The most significant accounting estimates inherent in the preparation of the Company’s financial statements include estimates as to the appropriate carrying value of certain assets and liabilities, which are not readily apparent from other sources. Such estimates and judgments are utilized for stock-based compensation expense, equity securities, derivative liabilities, and debt with embedded features.
Risks and Uncertainties
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, 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. The carrying values of those investments approximate their fair value due to their short maturity and liquidity. Cash includes cash on hand and amounts on deposit with financial institutions, which amounts may at times exceed federally insured limits. 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, 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
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (the “exit price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy based on three levels of inputs, of which the first two are considered observable, and the last is considered unobservable, is used to measure fair value:
Level 1:
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Valuations for assets and liabilities traded in active markets from readily available pricing sources such as quoted prices in active markets for identical assets or liabilities.
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Level 2:
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Observable inputs (other than Level 1 quoted prices) such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
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Level 3:
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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.
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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).
Income Taxes
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. These items are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. 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 (Loss) Income in the period incurred. When necessary, the Company recognizes interest and penalties related to income tax matters in income tax expense.
The Company records a valuation allowance against deferred tax assets to the extent that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In making such determinations, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. 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 (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.
Convertible Instruments
The Company accounts for hybrid contracts with embedded conversion features in accordance with GAAP. ASC 815, Derivatives and Hedging Activities (“ASC 815”) requires companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
The Company accounts for convertible debt instruments with embedded conversion features in accordance with ASC 470-20, Debt with Conversion and Other Options (“ASC 470-20”) if it is determined that the conversion feature should not be bifurcated from their host instruments. Under ASC 470-20, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the difference between the fair value of the underlying common stock at the commitment date and the embedded effective conversion price. When the Company determines that the embedded conversion option should be bifurcated from its host instrument, the embedded feature is accounted for in accordance with ASC 815. Under ASC 815, a portion of the proceeds received upon the issuance of the hybrid contract is allocated to the fair value of the derivative. The derivative is subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reported in the results of operations.
The Company also follows ASC 480-10, Distinguishing Liabilities from Equity (“ASC 480-10”) when evaluating the accounting for its hybrid instruments. A financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares shall be classified as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on any one of the following: (a) a fixed monetary amount known at inception (for example, a payable settled with a variable number of the issuer’s equity shares); (b) variations in something other than the fair value of the issuer’s equity shares (for example, a financial instrument indexed to the Standard and Poor’s S&P 500 Index and settled with a variable number of the issuer’s equity shares); 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 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. Generally, if a derivative is a liability and exercisable within one year, it will be classified as short-term. 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 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 expense (income) in the Consolidated Statements of Comprehensive (Loss) Income.
Debt Issuance Costs and Interest
Discounts related to bifurcated derivatives, freestanding instruments issued in bundled transactions, and issuance costs are recorded as a reduction to the carrying value of the debt and amortized over the life of the debt using the effective interest method. The Company makes changes to the effective interest rate, as necessary, on a prospective basis. For debt facilities that provide for multiple advances, the Company initially defers any issuance costs until the first advance is made and then amortizes the costs over the life of the facility.
Research and Development Expenses and Licensed Technology
Research and development costs are expensed when incurred. These costs may consist of external research and development expenses incurred under agreements with third party contract research organizations and investigative sites, third party manufacturing organizations and consultants; license fees; employee-related expenses, which include salaries and benefits for the personnel involved in the Company’s preclinical and clinical drug development activities; facilities expense, and other expenses; and equipment and laboratory supplies.
Costs incurred for the rights to use licensed technologies in the research and development process, including licensing fees and milestone payments, are charged to research and development expense as incurred in situations where the Company has not identified an alternative future use for the acquired rights, and are capitalized in situations where there is an identified alternative future use. No cost associated with the use of licensed technologies has been capitalized to date.
Stock-Based Compensation Expense
Stock-based compensation expense is estimated at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period with forfeitures accounted for as they occur. The Company uses the Black-Scholes Merton option pricing model for estimating the grant date fair value of stock options using the following assumptions:
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·
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Volatility - Stock price volatility is estimated over the expected term based on a blended rate of industry peers and the Company’s actual stock volatility adjusted for periods in which significant financial variability was identified.
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·
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Expected term - The expected term is based on a simplified method which defines the life as the weighted average of the contractual term of the options and the vesting period for each award.
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·
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Risk-free rate - The risk-free interest rate for the expected term of the option is based on the average market rate on U.S. Treasury securities in effect during the period in which the awards were granted.
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·
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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.
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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 (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 (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 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, 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. 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.
3. Warrants and Derivative Liabilities
Warrants
There are significant judgments and estimates inherent in the determination of the fair value of the Company’s warrants. These judgments and estimates include assumptions regarding the Company’s future operating performance, the time to completing a liquidity event and the determination of the appropriate valuation methods. If the Company had made different assumptions, the fair value of the warrants could have been significantly different (See Note 2).
Warrants vested and outstanding as of December 31, 2020 are summarized as follows:
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Number of
Warrants
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Exercise
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Term
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Vested and
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Source
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Price
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(Years)
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Outstanding
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Pre 2015 Common Stock Warrants
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$
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1.00
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|
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6-10
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1,110,000
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2015 Common Stock Warrants
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$
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5.00
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|
|
5-10
|
|
|
|
100,000
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|
2016 Common Stock Warrants to Service Providers
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$
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1.15
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|
|
|
10
|
|
|
|
40,000
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|
2016 Series C Common Stock Warrants to Placement Agent
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|
$
|
0.40
|
|
|
|
5
|
|
|
|
125,000
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|
2017 Series D Common Stock Warrants to Placement Agent
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|
$
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0.25
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|
|
|
5
|
|
|
|
480,000
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2017 Common Stock Warrants to Service Provider
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$
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0.41
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|
|
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5
|
|
|
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125,000
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2018 Emerald Financing Warrants
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$
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0.10
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|
|
|
5
|
|
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3,400,000
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Emerald Multi-Draw Credit Agreement Warrants
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$
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0.50
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|
|
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5
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|
|
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7,500,000
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2019 Common Stock Warrants
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|
$
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0.35
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|
|
|
5
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|
|
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8,000,000
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2020 Common Stock Warrants
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$
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0.06
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|
|
|
5
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|
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116,666,668
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2020 Common Stock Warrants to Placement Agent
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$
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0.075
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|
|
|
4.99
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|
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8,166,667
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2020 Pre-Funded Warrants
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$
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0.001
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Indefinite
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11,800,000
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Total warrants vested and outstanding as of December 31, 2020
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157,513,335
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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:
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Common Stock Warrants
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Pre-funded
Warrants
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Placement Agent Warrants
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Dividend yield
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0.00
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%
|
|
|
0.00
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%
|
|
|
0.00
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%
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Volatility factor
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|
91.64
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%
|
|
|
93.86
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%
|
|
|
91.64
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%
|
Risk-free interest rate
|
|
|
0.19
|
%
|
|
|
0.52
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%
|
|
|
0.19
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%
|
Expected term (years)
|
|
|
5.0
|
|
|
|
10
|
|
|
|
4.99
|
|
Underlying common stock price
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
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). The warrants are equity classified at issuance and the Company allocated an aggregate of $722,208 of the gross proceeds to the warrants on a relative fair value basis. The warrants vested immediately and had an estimated aggregate fair value of $1,130,400 utilizing the Black-Scholes option pricing model with the following assumptions:
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At Issuance
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|
Dividend yield
|
|
|
0.00
|
%
|
Volatility factor
|
|
|
93.08
|
%
|
Risk-free interest rate
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|
|
1.62
|
%
|
Expected term (years)
|
|
|
5.0
|
|
Underlying common stock price
|
|
$
|
0.22
|
|
Emerald Multi-Draw Credit Agreement Warrants
During the year ended December 31, 2019, the Company issued 5,000,000 fully vested common stock warrants to Emerald Health Sciences, in conjunction with advances under the Credit Agreement discussed below (See Note 4). The warrants are equity classified at issuance and the Company allocated an aggregate of $716,110 of the gross proceeds to the warrants on a relative fair value basis. The proceeds allocated to the warrants were recorded as discounts to each advance and are being amortized over the term of the debt. The warrants vested immediately and had an estimated aggregate fair value of $1,830,573 utilizing the Black-Scholes option pricing model with the following assumptions:
|
|
At Issuance
|
|
Dividend yield
|
|
|
0.00
|
%
|
Volatility factor
|
|
91.6-92.1
|
%
|
Risk-free interest rate
|
|
2.23-2.51
|
%
|
Expected term (years)
|
|
|
5.0
|
|
Underlying common stock price
|
|
$0.33-0.69
|
|
Derivative Liabilities
The following tables summarize the activity of derivative liabilities for the periods indicated:
|
|
Year Ended December 31, 2020
|
|
|
|
December 31,
2019,
Fair
Value of
Derivative Liabilities
|
|
|
Fair
Value of
Derivative Liabilities Issued
|
|
|
Change in
Fair value of
Liabilities
|
|
|
Reclassification
of Derivatives
to Equity
|
|
|
December 31,
2020,
Fair
Value of
Derivative Liabilities
|
|
Emerald Multi-Draw Credit Agreement - compound derivative liability (1)
|
|
$
|
90,797
|
|
|
$
|
-
|
|
|
$
|
(90,797
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Emerald Financing - warrant liability (2)
|
|
|
276,024
|
|
|
|
-
|
|
|
|
(237,457
|
)
|
|
|
-
|
|
|
|
38,567
|
|
Series B - warrant liability (3)
|
|
|
134,579
|
|
|
|
-
|
|
|
|
(108,016
|
)
|
|
|
(26,563
|
)
|
|
|
-
|
|
Total derivative liabilities
|
|
$
|
501,400
|
|
|
$
|
-
|
|
|
$
|
(436,270
|
)
|
|
$
|
(26,563
|
)
|
|
$
|
38,567
|
|
Less, noncurrent portion of derivative liabilities
|
|
|
(90,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Current balance of derivative liabilities
|
|
$
|
410,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,567
|
|
|
|
Year Ended December 31, 2019
|
|
|
|
December 31, 2018, Fair Value of Derivative Liabilities
|
|
|
Fair Value of Derivative Liabilities Issued
|
|
|
Change in
Fair value of
Liabilities
|
|
|
Reclassification of Derivatives to Equity or Extinguishment
|
|
|
December 31, 2019, Fair Value of Derivative Liabilities
|
|
Emerald Multi-Draw Credit Agreement - compound derivative liability (1)
|
|
$
|
219,453
|
|
|
$
|
516,058
|
|
|
$
|
(484,147
|
)
|
|
$
|
(160,567
|
)*
|
|
$
|
90,797
|
|
Emerald Financing - warrant liability (2)
|
|
|
15,251,413
|
|
|
|
-
|
|
|
|
(9,042,066
|
)
|
|
|
(5,933,323
|
)
|
|
|
276,024
|
|
Series B - warrant liability (3)
|
|
|
487,500
|
|
|
|
-
|
|
|
|
(208,546
|
)
|
|
|
(144,375
|
)
|
|
|
134,579
|
|
Total derivative liabilities
|
|
$
|
15,958,366
|
|
|
$
|
516,058
|
|
|
$
|
(9,734,759
|
)
|
|
$
|
(6,238,265
|
)
|
|
$
|
501,400
|
|
Less, noncurrent portion of derivative liabilities
|
|
|
(219,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90,797
|
)
|
Current balance of derivative liabilities
|
|
$
|
15,738,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
410,603
|
|
*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)
In connection with the advances under the Credit Agreement (See Note 4), the Company bifurcated a compound derivative liability related to a contingent interest feature and acceleration upon default provision (contingent put option) provided to Emerald Health Sciences. The Company’s estimate of fair value of the compound derivative liability was determined by using a differential cash flows valuation model, wherein the fair value of the underlying debt facility and its conversion right are estimated both with and without the presence of the contingent interest feature, holding all other assumptions constant. 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 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 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.
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 considered de minimis before and after the amendment to the Credit Agreement.
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. 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 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. The warrant holders also have the right to participate in subsequent financing transactions on an as-if converted basis.
In December 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. Under the Warrant Exercise Agreement between the Company and Emerald Health Sciences, the proceeds from the warrants were first applied directly to the accrued interest balance at the exercise date with the remainder applied to the oldest outstanding principal balances under the Credit Agreement. Immediately prior to exercise, the warrants were adjusted to fair value which considered the closing trading price on the exercise date (See Note 4).
The Company reviewed the warrants for liability or equity classification under the guidance of ASC 480-10, Distinguishing Liabilities from Equity, and concluded that the warrants should be classified as a liability and re-measured to fair value at the end of each reporting period. The Company also reviewed the warrants under ASC 815, Derivatives and Hedging/Contracts in Entity’s Own Equity, and determined that the warrants also meet the definition of a derivative. 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 Measurements.
The warrant liabilities were valued using Monte Carlo simulations conducted at the balance sheet dates using the following assumptions:
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Volatility factor
|
|
|
90.9
|
%
|
|
|
79.5
|
%
|
Risk-free interest rate
|
|
|
0.14
|
%
|
|
|
1.62
|
%
|
Expected term (years)
|
|
|
2.13
|
|
|
|
3.13
|
|
Underlying common stock price
|
|
$
|
0.04
|
|
|
$
|
0.13
|
|
Series B Warrant Liability (3)
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:
|
|
As of
December 31,
2019
|
|
Dividend yield
|
|
|
0.00
|
%
|
Volatility factor
|
|
|
79.2
|
%
|
Risk-free interest rate
|
|
|
1.60
|
%
|
Expected term (years)
|
|
|
0.64
|
|
Underlying common stock price
|
|
$
|
0.13
|
|
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.
4. Debt
Multi-Draw Credit Agreement- Related Party
The Company’s Debt with Emerald Health Sciences consists of the following:
|
|
|
|
|
As of December 31,
|
|
|
|
Conversion
Price
|
|
|
2020
|
|
|
2019
|
|
Total principal value of convertible debt—related party
|
|
$
|
0.40
|
|
|
$
|
2,014,500
|
|
|
$
|
2,014,500
|
|
Unamortized debt discount
|
|
|
|
|
|
|
(1,079,821
|
)
|
|
|
(1,622,344
|
)
|
Unamortized debt issuance costs
|
|
|
|
|
|
|
(3,576
|
)
|
|
|
(5,086
|
)
|
Carrying value of total convertible debt - related party
|
|
|
|
|
|
|
931,103
|
|
|
|
387,070
|
|
Total principal value of non-convertible debt—related party
|
|
|
n/a
|
|
|
|
450,000
|
|
|
|
-
|
|
Total carrying value of advances under the multi-draw credit agreement
|
|
|
|
|
|
$
|
1,381,103
|
|
|
$
|
387,070
|
|
On October 5, 2018, the Company entered into the Credit Agreement with Emerald Health Sciences, a related party (See Note 11). 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 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 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 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, 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.
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.
PPP Loan
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:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Related party interest expense – stated rate
|
|
$
|
161,546
|
|
|
$
|
371,420
|
|
PPP loan interest expense – stated rate
|
|
|
806
|
|
|
|
-
|
|
Non-cash interest expense:
|
|
|
|
|
|
|
|
|
Amortization of debt discount
|
|
|
542,523
|
|
|
|
616,383
|
|
Amortization of transaction costs
|
|
|
1,510
|
|
|
|
12,910
|
|
|
|
$
|
706,385
|
|
|
$
|
1,000,713
|
|
5. Stockholders’ Equity and Capitalization
Common Stock
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
In November 2019, the Company sold in a registered direct offering an aggregate of 8,000,000 shares of its common stock, par value $0.001 per share, and warrants to purchase 8,000,000 shares of common stock (Note 3). The aggregate net proceeds of the transaction were $1,919,372.
Warrant Exercises
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.
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, 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.
6. Stock-Based Compensation
Stock Incentive Plan
On October 31, 2014, after the closing of the Merger, the Board approved the Company’s 2014 Omnibus Incentive Plan (the “2014 Plan”). The 2014 Plan initially reserved 3,200,000 shares for future grants. 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. As of December 31, 2020, the shares available for future grant under the 2014 Plan are as follows:
|
|
Shares Available for Grant
|
|
Available as of December 31, 2019
|
|
|
13,128,381
|
|
Share pool increase
|
|
|
18,394,752
|
|
Forfeited
|
|
|
1,837,407
|
|
Cancelled
|
|
|
5,830,235
|
|
Granted
|
|
|
(26,400,000
|
)
|
Available as of December 31, 2020
|
|
|
12,790,775
|
|
Stock Options
Options granted under the 2014 Plan expire no later than ten years from the date of grant. Options granted under the 2014 Plan may be either incentive or non-qualified stock options. For incentive and non-qualified stock option grants, the option price shall be at least 100% of the fair value on the date of grants, as determined by the Company’s Board of Directors. If at any time the Company grants an option, and the optionee directly or by attribution owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, the option price shall be at least 110% of the fair value and shall not be exercisable more than five years after the date of grant.
Options granted under the 2014 Plan may be immediately exercisable if permitted in the specific grant approved by the Board of Directors and, if exercised early may be subject to repurchase provisions. The shares issued generally vest over a period of one to five years from the date of grant.
The following is a summary of option activities under the Company’s 2014 Plan for the year ended December 31, 2020:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2019
|
|
|
3,317,642
|
|
|
$
|
0.33
|
|
|
|
8.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
26,400,000
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(5,830,235
|
)
|
|
|
0.07
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,837,407
|
)
|
|
|
0.26
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2020
|
|
|
22,050,000
|
|
|
$
|
0.06
|
|
|
|
9.52
|
|
|
$
|
-
|
|
Exercisable, December 31, 2020
|
|
|
3,465,000
|
|
|
$
|
0.15
|
|
|
|
8.88
|
|
|
$
|
-
|
|
Vested and expected to vest, December 31, 2020
|
|
|
22,050,000
|
|
|
$
|
0.06
|
|
|
|
9.52
|
|
|
$
|
-
|
|
*The aggregate intrinsic value is the sum of the amounts by which the quoted market price of the Company’s stock exceeded the exercise price of the stock options at December 31, 2020 for those stock options for which the quoted market price was in excess of the exercise price (“in-the-money options”).
The weighted-average grant-date fair value of stock options granted for the years ended December 31, 2020 and 2019 was $0.04 and $0.22, respectively. The total fair value of the stock options that vested during the years ended December 31, 2020 and 2019 was $168,168 and $473,030, respectively.
The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model under the following assumptions:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Risk-free interest rate
|
|
0.28-0.46
|
%
|
|
|
1.49
|
%
|
Expected term (years)
|
|
5.65-6.13
|
|
|
|
5.65
|
|
Volatility
|
|
92.51-107.87
|
%
|
|
|
93.72
|
%
|
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.
Awards Granted Outside the 2014 Plan
Options
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.
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
The following is a summary of RSA activity outside of the Company’s 2014 Plan during the year ended December 31, 2020:
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
Unvested, December 31, 2019
|
|
|
450,000
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Released
|
|
|
(450,000
|
)
|
|
|
0.19
|
|
Unvested, December 31, 2020
|
|
|
-
|
|
|
$
|
-
|
|
Stock-Based Compensation Expense
The Company recognizes stock-based compensation expense using the straight-line method over the requisite service period. The Company recognized stock-based compensation expense, including compensation expense for RSAs discussed above, in its Consolidated Statements of Comprehensive (Loss) Income as follows:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Research and development
|
|
$
|
93,545
|
|
|
$
|
-
|
|
General and administrative
|
|
|
209,197
|
|
|
|
680,455
|
|
|
|
$
|
302,742
|
|
|
$
|
680,455
|
|
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.
7. 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
|
|
|
|
Loss
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per-Share
Amount
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,560,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
|
(6,560,699
|
)
|
|
|
230,746,878
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants – liability classified
|
|
|
(345,473
|
)
|
|
|
674,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders + assumed conversions
|
|
$
|
(6,906,172
|
)
|
|
|
231,420,973
|
|
|
$
|
(0.03
|
)
|
|
|
For the Year Ended December 31, 2019
|
|
|
|
Income
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per-Share
Amount
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,051,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders
|
|
|
1,051,825
|
|
|
|
135,154,931
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock
|
|
|
|
|
|
|
858,856
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
392,784
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
447,431
|
|
|
|
|
|
Warrants – liability classified
|
|
|
(9,250,612
|
)
|
|
|
32,706,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders + assumed conversions
|
|
$
|
(8,198,787
|
)
|
|
|
169,560,265
|
|
|
$
|
(0.05
|
)
|
The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been anti-dilutive:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Stock options
|
|
|
22,050,000
|
|
|
|
4,119,931
|
|
Unvested restricted stock
|
|
|
-
|
|
|
|
234,645
|
|
Common shares underlying convertible debt
|
|
|
5,126,343
|
|
|
|
5,036,250
|
|
Warrants
|
|
|
145,039,240
|
|
|
|
20,712,000
|
|
8. Income Taxes
The components of (loss) income before the income tax provision consist of the following:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
(6,556,280
|
)
|
|
$
|
1,120,521
|
|
Foreign
|
|
|
(2,819
|
)
|
|
|
(67,096
|
)
|
Pre-tax (loss) income from operations
|
|
$
|
(6,559,099
|
)
|
|
$
|
1,053,425
|
|
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.
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. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders.
Upon the occurrence of an ownership change under Section 382 as outlined above, utilization of the NOLs are subject to an annual limitation under Section 382 of the Code, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the NOL before utilization. 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.
The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred income tax assets are as follows:
|
|
As of December 31,
|
|
Current deferred tax assets/(liabilities):
|
|
2020
|
|
|
2019
|
|
State taxes
|
|
$
|
336
|
|
|
$
|
336
|
|
Amortization
|
|
|
180
|
|
|
|
-
|
|
Research and development credits
|
|
|
54,324
|
|
|
|
-
|
|
Other
|
|
|
83,056
|
|
|
|
112,222
|
|
Net operating loss
|
|
|
7,679,216
|
|
|
|
6,434,544
|
|
Gross deferred tax assets
|
|
|
7,817,112
|
|
|
|
6,547,102
|
|
Valuation allowance
|
|
|
(7,590,215
|
)
|
|
|
(6,206,450
|
)
|
Net deferred tax assets
|
|
$
|
226,897
|
|
|
$
|
340,652
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Note discount
|
|
$
|
(226,897
|
)
|
|
$
|
(340,652
|
|
Total deferred tax liabilities
|
|
|
(226,897
|
)
|
|
|
(340,652
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The provision for income taxes on earnings subject to income taxes differs from the statutory Federal rate at December 31, 2020 and 2019, due to the following:
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Expected income tax benefit at federal statutory tax rate
|
|
$
|
(1,377,411
|
)
|
|
$
|
221,219
|
|
State income taxes, net of federal benefit
|
|
|
(415,249
|
)
|
|
|
(434,881
|
)
|
Change in fair value of warrants
|
|
|
(72,549
|
)
|
|
|
(1,874,873
|
)
|
Change in valuation allowance
|
|
|
1,383,765
|
|
|
|
1,469,187
|
|
Uncertain tax positions
|
|
|
470,838
|
|
|
|
436,145
|
|
Change in compound derivative
|
|
|
-
|
|
|
|
(101,671
|
)
|
Loss on extinguishment of debt
|
|
|
33,925
|
|
|
|
117,198
|
|
Stock compensation
|
|
|
64,273
|
|
|
|
121,289
|
|
Rate adjustment
|
|
|
(108,649
|
)
|
|
|
49,338
|
|
Other permanent difference
|
|
|
22,657
|
|
|
|
(1,351
|
)
|
Provision for income taxes
|
|
$
|
1,600
|
|
|
$
|
1,600
|
|
The Company records a valuation allowance against deferred tax assets to the extent that it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. 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. 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. shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. 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.
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.
A reconciliation of the beginning and ending amounts of unrecognized tax positions are as follows:
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Unrecognized tax positions, beginning of the year
|
|
$
|
552,082
|
|
|
$
|
-
|
|
Gross increase - current period tax positions
|
|
|
585,812
|
|
|
|
552,082
|
|
Gross decrease – prior period tax positions
|
|
|
(3,721
|
)
|
|
|
|
|
Unrecognized tax positions, end of year
|
|
$
|
1,134,173
|
|
|
$
|
552,082
|
|
If recognized, none of the unrecognized tax positions would impact the Company’s income tax benefit or effective tax rate as long as the Company’s net deferred tax assets remain subject to a full valuation allowance. 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.
9. Other Current Liabilities
Other current liabilities consist of the following:
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accrued payroll liabilities
|
|
|
61,547
|
|
|
|
43,830
|
|
Accrued research and development costs
|
|
|
93,888
|
|
|
|
148,006
|
|
Accrued legal expense
|
|
|
57,596
|
|
|
|
92,237
|
|
Accrued board fees
|
|
|
40,625
|
|
|
|
58,395
|
|
Total other accrued liabilities
|
|
|
5,455
|
|
|
|
77,938
|
|
|
|
$
|
259,111
|
|
|
$
|
420,406
|
|
10. Significant Contracts - University of Mississippi
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, 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 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:
i)
|
$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;
|
|
|
ii)
|
$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); and
|
|
|
iii)
|
$400,000 paid within 30 days following the approval 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 approved product(s).
|
The royalty percentage due on net sales under each License Agreement is in the mid-single digits. The Company must also pay to UM a portion of all licensing fees received from any sublicensees, subject to a minimum royalty on net sales, and the Company is required to reimburse patent costs incurred by UM related to the licensed products. The royalty obligations apply by country and by licensed product, and end upon the later of the date that no valid claim of a licensed patent covers a licensed product in a given country, or ten years after the first commercial sale of such licensed product in such country.
Each License Agreement continues, unless terminated, until the later of the expiration of the last to expire of the patents or patent applications within the licensed technology or the expiration of the Company’s payment obligations under such License Agreement. UM may terminate each License Agreement, by giving written notice of termination, upon the Company’s material breach of such License Agreement, including failure to make payments or satisfy covenants, representations or warranties without cure, noncompliance, a bankruptcy event, the Company’s dissolution or cessation of operations, the Company’s failure to make reasonable efforts to commercialize at least one product or failure to keep at least one product on the market after the first commercial sale for a continuous period of one year, other than for reasons outside the Company’s control, or the Company’s failure to meet certain pre-established development milestones. The Company may terminate each License Agreement upon 60 days’ written notice to UM.
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 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. The Company must also pay to UM a percentage of all licensing fees we receive from any sublicensees, subject to a minimum royalty on net sales by such sublicensees. The Company’s royalty obligations apply on a country by country and licensed product by licensed product basis, and end upon the later of the date that no valid claim of a licensed patent covers a licensed product in a given country, or ten years after first commercial sale of such licensed product in such country.
The license agreement continues, unless terminated, until the later of the expiration of the last to expire of the patents or patent applications within the licensed technology or expiration of the Company’s payment obligations under the license. UM may terminate the license agreement, effective with the giving of notice, if: (a) the Company fails to pay any material amount payable to UM under the license agreement and do not cure such failure within 60 days after UM notifies us of such failure, (b) the Company materially breaches any covenant, representation or warranty in the license agreement and do not cure such breach within 60 days after UM notifies the Company of such breach, (c) the Company fails to comply in any material respect with the terms of the license and do not cure such noncompliance within 60 days after UM notifies us of such failure, (d) the Company is subject to a bankruptcy event, (e) the Company dissolves or ceases operations or (f) if after the first commercial sale of a product during the term of the license agreement, the Company materially fails to make reasonable efforts to commercialize at least one product or fail to keep at least one product on the market after the first commercial sale for a continuous period of one year, other than for reasons outside of the Company’s control. The Company may terminate the license agreement upon 60 days’ written notice to UM.
As of December 31, 2020, none of the milestones under this license agreement have been met.
11. Related Party Matters
Emerald Health Sciences
On February 1, 2018, the Company entered into an 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 reimbursement 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 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. 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. Avtar Dhillon resigned as the Chairman of the Board and the position of Chairman of the Finance and Business Development Committee of the Board. Concurrently, the Company entered into a Board Observer Agreement with Emerald Health Sciences to allow Dr. Dhillon to continue as a representative of Emerald Health Sciences as a non-voting observer in future meetings of the Board.
On December 19, 2019, the Company 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 the Company. In exchange for his services, 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, 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 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. 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.
12. 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.
13. Subsequent Events
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. 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.
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
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Description of Exhibit
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3.1 *
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Articles of Incorporation of Registrant, as amended
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3.2*
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Amended and Restated Bylaws of Registrant
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3.3
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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)
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4.1
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Form of Warrants issued by Nemus to certain security holders to purchase an aggregate of 3,000,000 shares of commons stock (2)
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4.2
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Form of Warrants issued by Nemus to certain security holders to purchase an aggregate of 1,000,000 shares of commons stock (2)
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4.3
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Form of Common Stock Purchase Warrant to certain security holders to purchase shares of common stock (3)
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4.4
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Form of Warrant dated April 25, 2015 issued by Nemus Bioscience, Inc. to holder to purchase 100,000 shares of common stock (4)
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4.5
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Form of Warrant dated April 29, 2015 issued by Nemus Bioscience, Inc. to holder to purchase 90,000 shares of common stock (5)
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4.6
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Form of Warrant dated April 26, 2015 issued by Nemus Bioscience, Inc. to holder to purchase 6,000 shares of common stock (5)
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4.7
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Form of Warrant dated June 8, 2015 issued by Nemus Bioscience, Inc. to holder to purchase 10,000 shares of common stock (6)
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4.8
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Form of Warrant to certain security holders to purchase shares of common stock (4)
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4.9
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Registration Rights Agreement, dated January 7, 2015, by and between Nemus Bioscience, Inc. and certain investors (7)
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4.10
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Form of Warrant(30)
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4.11
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Form of Warrant (34)
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4.12
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Form of Common Warrant(38)
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4.13
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Form of Pre-Funded Warrant(38)
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10.1†
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Nemus Bioscience, Inc. 2014 Omnibus Incentive Plan (2)
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10.2†
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Form of Stock Option Agreement under 2014 Omnibus Incentive Plan (2)
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10.3
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Memorandum of Understanding, dated July 31, 2013, between Nemus and University of Mississippi, National Center for Natural Products Research (2)
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10.9 **
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License Agreement, dated September 29, 2014, between Nemus and the University of Mississippi, School of Pharmacy (2)
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10.10 **
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License Agreement, dated September 29, 2014, between Nemus and the University of Mississippi, School of Pharmacy (2)
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10.11 **
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License Agreement, dated September 29, 2014, between Nemus and the University of Mississippi, School of Pharmacy (2)
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10.12
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Lease Agreement dated September 1, 2014 between University of Mississippi Research Foundation, Inc. and Nemus (2)
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10.13
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Center Tower Lease dated October 13, 2014, by and between Nemus and Center Tower Associates LLC. (2)
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10.17
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Common Stock Purchase Agreement, dated January 7, 2015, by and between Nemus Bioscience, Inc. and certain investors (7)
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10.19 †
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Form of Indemnification Agreement (8)
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10.20 †
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Nemus Bioscience, Inc. Officer Change in Control Severance Plan (9)
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10.21
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Form of Registration Rights Agreement between Nemus Bioscience, Inc. and certain investors (4) 10.22† Form of Restricted Stock Award Agreement under 2014 Omnibus Incentive Plan (10)
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10.23 **
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License Agreement, dated December 14, 2015, between Nemus and the University of Mississippi, School of Pharmacy (11)
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10.24 **
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License Agreement, dated December 14, 2015, between Nemus and the University of Mississippi, School of Pharmacy (11)
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10.25 **
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Letter Agreement with Albany Molecular Research Inc. dated February 5, 2016 (12)
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10.26
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Form of Securities Purchase Agreement between Nemus Bioscience, Inc. and certain investors (13)
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10.27
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Form of Registration Rights Agreement between Nemus Bioscience, Inc. and certain investors (13)
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10.28
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Form of Lock-up Agreement between Nemus Bioscience, Inc. and certain shareholders (14)
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10.29
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Form of Securities Purchase Agreement between Nemus Bioscience, Inc. and certain investors (15)
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10.30
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Form of Registration Rights Agreement between Nemus Bioscience, Inc. and certain investors (15)
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10.31
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Form of Lock-up Agreement between Nemus Bioscience, Inc. and certain shareholders (16)
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10.32 **
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License Agreement, dated January 10, 2017, between Nemus and the University of Mississippi, School of Pharmacy (17)
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10.33
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Securities Purchase Agreement, dated May 3, 2017, between Nemus Bioscience, Inc. and Schneider Finance LLC (18)
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10.34
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Financial Guarantee dated May 3, 2017 (19)
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10.35
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Form of Securities Purchase Agreement (20)
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10.36
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Form of Registration Rights Agreement (20) 10.37† Form of Restricted Stock Agreement (21)
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10.38
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Securities Purchase Agreement (21)
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10.39
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Convertible Bridge Promissory Note (22)
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10.40
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Independent Contractor Termination Agreement and Release (23) 10.41* Independent Contractor Agreement (23)
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10.42†
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Employment Agreement, dated May 25, 2018, between Nemus Bioscience, Inc. and Douglas Cesario (24) 10.43† Stock Option Agreement, dated May 25, 2018, between Nemus Bioscience, Inc. and Douglas Cesario (24)
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10.44 **
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Letter Agreement, dated July 31, 2018, by and between Nemus Bioscience, Inc. and Albany Molecular Research Inc. (25)
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10.45
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Multi-Draw Credit Agreement, dated October 5, 2018, by and between Nemus Bioscience, Inc. and Emerald Health Sciences, Inc. (26)
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10.46
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Registration Rights Agreement, dated October 5, 2018, by and between Nemus Bioscience, Inc. and Emerald Health Sciences, Inc. (26)
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10.47 †
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Amendment No. 1 to 2014 Omnibus Incentive Plan (26)
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10.48 **
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Master Development and Clinical Supply Agreement, dated February 26, 2019, by and between Nemus Bioscience, Inc. and Noramco, Inc. (29)
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10.49
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Restated and Amended License Agreement, dated as of May 24, 2019, by and between the Company and University of Mississippi, School of Pharmacy (31)
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10.50
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Restated and Amended License Agreement, dated as of May 24, 2019, by and between the Company and University of Mississippi, School of Pharmacy (31)
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10.51
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First Amendment to Master Development and Clinical Supply Agreement, dated as of August 7, 2019, by and between the Company and Noramco, Inc. (32)
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10.52
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Start-Up Agreement, dated as of August 23, 2019, by and between the Company and Novotech (33)
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10.53
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Master Services Agreement, dated as of September 20, 2019, by and between EMBI Australia and Novotech (Australia) Pty Limited (34)
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10.54
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Form of Securities Purchase Agreement, dated as of November 20, 2019, between the Company and certain purchasers set forth in the signature page thereto (35)
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10.55
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Warrant Exercise Agreement, dated as of December 20, 2019, between the Company and Emerald Health Sciences (36)
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10.56
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Independent Contractor Services Agreement, dated as of December 19, 2019, between the Company and Dr. Avtar Dhillon. (36)
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10.57
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Amended and Restated Multi-Draw Credit Agreement, dated April 29, 2020, by and between Emerald Bioscience, Inc. and Emerald Health Sciences, Inc. Sciences, Inc.(37)
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10.58
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Separation and Release Agreement, dated April 29, 2020, between Emerald Bioscience, Inc. and Douglas Cesario(37)
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10.59
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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)
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10.60
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Separation and Release Agreement, dated August 7, 2020, by and between Emerald Bioscience, Inc. and Brian Murphy(39)
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10.61
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Employment Agreement, dated August 10, 2020, by and between Emerald Bioscience, Inc. and Punit Dhillon(39)
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10.62
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Amendment No. 2 to 2014 Omnibus Incentive Plan(39)
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10.63*
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Collaborative Research Agreement, dated January 2021, by and between Skye Bioscience, Inc. and Emerald Health Biotechnology España, S.L.,
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____________
(2)
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Included as exhibit to our Current Report on Form 8-K filed on November 3, 2014.
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(3)
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Included as exhibit to our Current Report on Form 8-K filed April 7, 2015.
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(4)
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Included as exhibit to our Current Report on Form 8-K filed August 20, 2015.
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(5)
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Included as exhibit to our Quarterly Report on Form 10-Q filed May 13, 2015
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(6)
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Included as exhibit to our Quarterly Report on Form 10-Q filed August 14, 2015
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(7)
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Included as exhibit to our Current Report on Form 8-K filed on January 9, 2015.
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(8)
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Included as exhibit to our Current Report on Form 8-K filed on January 12, 2015.
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(9)
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Included as exhibit to our Current Report on Form 8-K filed on February 27, 2015.
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(10)
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Included as exhibit to our Current Report on Form 8-K filed on October 22, 2015.
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(11)
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Included as exhibit to our Current Report on Form 8-K filed on December 18, 2015.
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(12)
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Included as exhibit to our Annual Report on Form 10-K filed on March 21, 2016.
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(13)
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Included as exhibit to our Current Report on Form 8-K filed on October 26, 2016
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(14)
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Included as exhibit to our Current Report on Form 8-K filed on October 27, 2016.
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(15)
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Included as exhibit to our Current Report on Form 8-K filed on December 29, 2016.
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(16)
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Included as exhibit to our Current Report on Form 8-K filed on January 10, 2017.
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(17)
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Included as exhibit to our Current Report on Form 8-K/A filed on January 20, 2017.
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(18)
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Included as exhibit to our Current Report on Form 8-K filed on May 4, 2017.
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(19)
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Included as exhibit to our Current Report on Form 8-K filed on July 11, 2017.
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(20)
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Included as exhibit to our Current Report on Form 8-K filed on November 2, 2017.
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(21)
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Included as exhibit to our Current Report on Form 8-K filed on January 22, 2018.
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(22)
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Included as exhibit to our Current Report on Form 8-K filed on January 3, 2018.
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(23)
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Included as exhibit to our Annual Report on Form 10-K filed on March 19, 2018.
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(24)
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Included as exhibit to our Current Report on Form 8-K filed on June 1, 2018.
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(25)
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Included as exhibit to our Current Report on Form 8-K filed on August 1, 2018.
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(26)
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Included as exhibit to our Current Report on Form 8-K filed on October 12, 2018.
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|
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(29)
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Included as exhibit to our Current Report on Form 8-K filed on March 4, 2019.
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(30)
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Included as exhibit to our Annual Report on Form 10-K filed on March 14, 2019.
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(31)
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Included as exhibit to our Current Report on Form 8-K filed on May 29, 2019.
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(32)
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Included as exhibit to our Current Report on Form 8-K filed on August 8, 2019.
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(33)
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Included as exhibit to our Current Report on Form 8-K filed on August 27, 2019.
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(34)
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Included as exhibit to our Quarterly Report on Form 10-Q filed on September 30, 2019.
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(35)
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Included as exhibit to our Current Report on Form 8-K filed on November 21, 2019.
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(36)
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Included as exhibit to our Current Report on Form 8-K filed on December 20, 2019.
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(37)
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Included as exhibit to our Current Report on Form 8-K filed on April 29, 2020.
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(38)
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Included as exhibit to our Current Report on Form 8-K filed on August 5, 2020
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(39)
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Included as exhibit to our Current Report on Form 8-K filed on August 12, 2020
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_________
* Filed Herewith
** Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.
*** Furnished Herewith
† Management contract or compensatory plan or arrangement.
†† In accordance with Regulation S-T, XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not otherwise subject to liability under these sections.
Item 16. Form 10-K Summary.
None.