Edesa Biotech, Inc. 10-Q

Item 1. Financial Statements EDESA BIOTECH, INC. Condensed Interim Consolidated Balance Sheets December 31, 2021 September 30, 2021 Assets: Current assets: Cash and cash equivalents $ 5,880,749 $ 7,839,259 Accounts and other receivable 2,876,269 3,302,827 Prepaid expenses and other current assets 1,134,774 948,645 Total current assets 9,891,792 12,090,731 Non-current assets: Property and equipment, net 16,529 14,989 Intangible asset, net 2,357,071 2,382,364 Operating lease right-of-use assets 77,964 96,571 Total assets $ 12,343,356 $ 14,584,655 Liabilities and shareholders’ equity: Current liabilities: Accounts payable and accrued liabilities $ 1,666,700 $ 1,379,842 Short-term operating lease liabilities 80,167 78,808 Total current liabilities 1,746,867 1,458,650 Non-current liabilities: Long-term payables 47,244 47,202 Long-term operating lease liabilities - 20,512 Total liabilities 1,794,111 1,526,364 Commitments (Note 5) Shareholders’ equity: Capital shares Authorized unlimited common and preferred shares without par value Issued and outstanding: 13,518,799 common shares (September 30, 2021 - 13,295,403 ) 36,116,225 34,887,721 Additional paid-in capital 5,480,739 4,871,461 Accumulated other comprehensive loss ( 173,413 ) ( 205,262 ) Accumulated deficit ( 30,874,306 ) ( 26,495,629 ) Total shareholders’ equity 10,549,245 13,058,291 Total liabilities and shareholders’ equity $ 12,343,356 $ 14,584,655 The accompanying notes are an integral part of these condensed interim consolidated financial statements. 3 Table of Contents EDESA BIOTECH, INC. Condensed Interim Consolidated Statements of Operations Three Months Ended December 31, 2021 December 31, 2020 Expenses: Research and development 3,951,046 1,379,654 General and administrative 1,210,677 1,234,148 Loss from Operations ( 5,161,723 ) ( 2,613,802 ) Other Income (Loss): Reimbursement grant income 780,257 - Interest income 6,120 922 Foreign exchange loss ( 3,331 ) ( 24,732 ) 783,046 ( 23,810 ) Net Loss ( 4,378,677 ) ( 2,637,612 ) Exchange differences on translation 31,849 103,427 Net Comprehensive Loss $ ( 4,346,828 ) $ (2,534,185 ) Weighted average number of common shares 13,351,547 10,277,750 Loss per common share - basic and diluted $ ( 0.33 ) $ ( 0.26 ) The accompanying notes are an integral part of these condensed interim consolidated financial statements. 4 Table of Contents EDESA BIOTECH, INC. Condensed Interim Consolidated Statements of Cash Flows Three Months Ended December 31, 2021 December 31, 2020 Cash Flows from Operating Activities: Net loss $ ( 4,378,677 ) $ ( 2,637,612 ) Adjustments for: Depreciation and amortization 29,752 28,843 Share-based compensation 609,278 722,909 Changes in working capital items: Accounts and other receivable 432,792 ( 75,127 ) Prepaid expenses and other current assets ( 186,584 ) ( 377,308 ) Accounts payable and accrued liabilities 285,825 ( 672,234 ) Net cash used in operating activities ( 3,207,614 ) ( 3,010,529 ) Cash Flows from Investing Activities: Purchase of property and equipment ( 3,140 ) ( 1,135 ) Net cash used in investing activities ( 3,140 ) ( 1,135 ) Cash Flows from Financing Activities: Proceeds from issuance of common shares and warrants 1,287,167 1,026,528 Proceeds from exercise of warrants - 995,038 Payments for issuance costs of common shares ( 58,663 ) ( 41,940 ) Proceeds from borrowings - 15,346 Net cash provided by financing activities 1,228,504 1,994,972 Effect of exchange rate changes on cash and cash equivalents 23,740 108,290 Net change in cash and cash equivalents ( 1,958,510 ) ( 908,402 ) Cash and cash equivalents, beginning of period 7,839,259 7,213,695 Cash and cash equivalents, end of period $ 5,880,749 $ 6,305,293 Supplemental Disclosure of Noncash Financing Activities: Preferred shares converted from temporary equity to common shares $ - $ 1,118,353 The accompanying notes are an integral part of these condensed interim consolidated financial statements. 5 Table of Contents EDESA BIOTECH, INC. Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity Shares # Common Shares Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Shareholders' Equity Three Months Ended December 31, 2021 Balance - September 30, 2021 13,295,403 $ 34,887,721 $ 4,871,461 $ ( 205,262 ) $ ( 26,495,629 ) $ 13,058,291 Issuance of common shares in equity offerings 223,396 1,287,167 - - - 1,287,167 Issuance costs - ( 58,663 ) - - - ( 58,663 ) Share-based compensation - - 609,278 - - 609,278 Net loss and comprehensive loss - - - 31,849 ( 4,378,677 ) ( 4,346,828 ) Balance - December 31, 2021 13,518,799 $ 36,116,225 $ 5,480,739 $ ( 173,413 ) $ ( 30,874,306 ) $ 10,549,245 Three Months Ended December 31, 2020 Balance - September 30, 2020 9,615,119 $ 18,500,853 $ 1,550,480 $ ( 287,204 ) $ ( 13,132,954 ) $ 6,631,175 Issuance of common shares in equity offerings 169,753 1,026,528 - - - 1,026,528 Issuance costs - ( 60,983 ) - - - ( 60,983 ) Issuance of common shares upon exercise of warrants 243,369 1,111,708 ( 116,670 ) - - 995,038 Conversion of convertible preferred shares 494,846 1,118,353 - - - 1,118,353 Preferred return on convertible preferred shares - - - - ( 13,611 ) ( 13,611 ) Share-based compensation - - 722,909 - - 722,909 Net loss and comprehensive loss - - - 103,427 (2,637,612 ) (2,534,185 ) Balance - December 31, 2020 10,523,087 $ 21,696,459 $ 2,156,719 $ (183,777 ) $ (15,784,177 ) $ 7,885,224 The accompanying notes are an integral part of these condensed interim consolidated financial statements. 6 Table of Contents EDESA BIOTECH, INC. Notes to Condensed Interim Consolidated Financial Statements (Unaudited) 1. Nature of Operations Edesa Biotech, Inc. (the “Company” or “Edesa”) is a biopharmaceutical company focused on acquiring, developing and commercializing clinical-stage drugs for inflammatory and immune-related diseases with clear unmet medical needs. The Company is organized under the laws of British Columbia, Canada and is headquartered in Markham, Ontario, Canada. The Company’s common shares trade on The Nasdaq Capital Market in the United States under the symbol “EDSA”. Impact of COVID-19 The ongoing COVID-19 pandemic has severely impacted global economic activity and has caused material disruptions to almost every industry directly or indirectly. The full impact of the pandemic remains uncertain and ongoing developments related to the pandemic may cause material impacts to the Company’s future operations, clinical study timelines and financial results. While the full impact of the COVID-19 pandemic to business and operating results presents additional uncertainty, the Company’s management continues to use reasonably available information to assess impacts to the Company’s business plans and financial condition. 2. Basis of Preparation The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q. They do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. GAAP for complete financial statements. These condensed interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended September 30, 2021, which was filed with the Securities and Exchange Commission (SEC) on December 28, 2021. The accompanying condensed interim consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Edesa Biotech Research, Inc., an Ontario corporation, and Edesa Biotech USA, Inc., a California corporation in the U.S. All intercompany balances and transactions have been eliminated in consolidation. All adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the results of operations for the periods presented have been included in the interim periods. Operating results for the three months ended December 31, 2021 are not necessarily indicative of the results that may be expected for other interim periods or the fiscal year ending September 30, 2022. Use of estimates The preparation of consolidated financial statements in conformity with U.S. 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 financial statements and the reported amounts of revenue and expenses during the period or year. Actual results could differ from those estimates. Areas where significant judgment is involved in making estimates are valuation of accounts and other receivable; valuation and useful lives of property and equipment; intangible assets; operating lease right-of-use assets; deferred income taxes; classification of convertible preferred shares as liability or equity; the determination of fair value of share-based compensation; the determination of fair value of warrants in order to allocate proceeds from equity issuances; and forecasting future cash flows for assessing the going concern assumption. Functional and reporting currencies The consolidated financial statements of the Company are presented in U.S. dollars, unless otherwise stated, which is the functional currency of the Company and its U.S. subsidiary. The functional currency of the Company’s Canadian subsidiary, as determined by management, is Canadian dollars. 7 Table of Contents EDESA BIOTECH, INC. Notes to Condensed Interim Consolidated Financial Statements (Unaudited) 3. Intangible Assets Acquired License In April 2020, the Company entered into a license agreement with a pharmaceutical development company to obtain exclusive world-wide rights to know-how, patents and data relating to certain monoclonal antibodies (“the Constructs”), including sublicensing rights. Unless earlier terminated, the term of the license agreement will remain in effect for 25 years from the date of first commercial sale of licensed products containing the Constructs. Subsequently, the license agreement will automatically renew for five-year periods unless either party terminates the agreement in accordance with its terms. Under the license agreement, the Company is exclusively responsible, at its expense, for the research, development, manufacture, marketing, distribution and commercialization of the Constructs and licensed products and to obtain all necessary licenses and rights. The Company is required to use commercially reasonable efforts to develop and commercialize the Constructs in accordance with the terms of a development plan established by the parties. The Company has determined that the license has multiple alternative future uses in research and development projects and sublicensing in other countries or for other disease indications. The value of the acquired license is recorded as an intangible asset with amortization over the estimated useful life of 25 years and evaluation for impairment at the end of each reporting period. The required upfront license payment of $2.5 million was paid by issuance of Series A-1 Convertible Preferred Shares which were subsequently converted to common shares. The value of the license includes acquisition legal costs. See Note 5 for license commitments. Intangible assets, net consisted of the following: December 31, 2021 September 30, 2021 The Constructs $ 2,529,483 $ 2,529,483 Less: accumulated amortization ( 172,412 ) ( 147,119 ) Total intangible assets, net $ 2,357,071 $ 2,382,364 Amortization expense amounted to $ 0.03 million for each of the three months ended December 31, 2021, and 2020. Total estimated future amortization of intangible assets for each fiscal year is as follows: Year Ending September 30, 2022 $ 75,879 September 30, 2023 101,172 September 30, 2024 101,172 September 30, 2025 101,172 September 30, 2026 101,172 Thereafter 1,876,504 $ 2,357,071 8 Table of Contents EDESA BIOTECH, INC. Notes to Condensed Interim Consolidated Financial Statements (Unaudited) 4. Related Party Operating Lease The Company leases facilities used for executive offices from a company controlled by the Company’s CEO for a six-year term through December 2022, with options to renew for another two-year term. The option period is not included in the operating lease right-of-use assets and liabilities. The components of lease cost were as follows: Three Months Ended December 31, 2021 December 31, 2020 Operating lease cost, included in general and administrative on the Statements of Operations $ 20,353 $ 19,688 Lease terms and discount rates were as follows: December 31, 2021 September 30, 2021 Remaining lease term (months): 12 15 Estimated incremental borrowing rate: 6.5 % 6.5 % The approximate future minimum lease payments under operating leases at December 31, 2021 were as follows: Year Ending September 30, 2022 $ 62,263 September 30, 2023 20,754 Total lease payment 83,017 Less imputed interest 2,850 Present value of lease liabilities, short-term $ 80,167 Cash flow information was as follows: Three Months Ended December 31, 2021 December 31, 2020 Cash paid for amounts included in the measurement of lease liabilities, included in accounts payable and accrued liabilities on the Statements of Cash Flows $ 20,354 $ 19,688 9 Table of Contents EDESA BIOTECH, INC. Notes to Condensed Interim Consolidated Financial Statements (Unaudited) 5. Commitments Research and other commitments The Company has commitments for contracted research organizations that perform clinical trials for the Company’s ongoing clinical studies, other service providers and the drug substance acquired in connection with a license agreement. Aggregate future contractual payments at December 31, 2021 are as follows: Year Ending September 30, 2022 $ 3,889,000 September 30, 2023 228,000 September 30, 2024 75,000 September 30, 2025 12,000 $ 4,204,000 License and royalty commitments In April 2020, through its Ontario subsidiary, the Company entered into a license agreement with a third party to obtain exclusive world-wide rights to certain know-how, patents and data relating to certain monoclonal antibodies (“the Constructs”), including sublicensing rights. An intangible asset for the acquired license has been recognized. See Note 3 for intangible assets. Under the license agreement, the Company recorded an expense of $ 3.5 million as a result of meeting a milestone during the year ended September 30, 2021 and is committed to remaining payments of up to an aggregate amount of $ 352.5 million contingent upon meeting certain milestones outlined in the license agreement, primarily relating to future potential commercial approval and sales milestones. The Company also has a commitment to pay royalties based on any net sales of products containing the Constructs in the countries where the Company directly commercializes the products containing the Constructs and a percentage of any sublicensing revenue received by the Company and its affiliates in the countries where it does not directly commercialize the products containing the Constructs. No royalty or sublicensing payments were made to the third party during the three months ended December 31, 2021 and 2020. In connection with this license agreement and pursuant to a purchase agreement entered into in April 2020, the Company acquired drug substance of one of the Constructs for an aggregate purchase price of $5.0 million, payable in two future installments based on the earlier of certain clinical trial progress or fixed dates. A payment of $2.5 million was made for the drug substance during the year September 30, 2021. The remaining purchase commitment is included in the table above for the year ending September 30, 2022. In 2016, through its Ontario subsidiary, the Company entered into a license agreement with a third party to obtain exclusive rights to certain know-how, patents and data relating to a pharmaceutical product. The Company will use the exclusive rights to develop the product for therapeutic, prophylactic and diagnostic uses in topical dermal applications and anorectal applications. No intangible assets have been recognized under the license agreement with the third party. Under the license agreement, the Company is committed to payments of various amounts to the third party upon meeting certain milestones outlined in the license agreement, up to an aggregate amount of $ 18.6 million. Upon divestiture of substantially all of the assets of the Company, the Company shall pay the third party a percentage of the valuation of the licensed technology sold as determined by an external objective expert. The Company also has a commitment to pay the third party a royalty based on net sales of the product in countries where the Company, or an affiliate, directly commercializes the product and a percentage of sublicensing revenue received by the Company and its affiliates in the countries where it does not directly commercialize the product. No milestone, license or royalty payments were made to the third party during the three months ended December 31, 2021 and 2020. In March 2021, through its Ontario subsidiary, the Company entered into a license agreement with the inventor of the same pharmaceutical product to acquire global rights for all fields of use beyond those named under the 2016 license agreement. For the three months ended December 31, 2021, the Company recorded an expense of $ 0.03 million as a result of meeting milestones outlined in the 2021 license agreement. The Company is committed to remaining payments of up to an aggregate amount of $ 68.9 million, primarily relating to future potential commercial approval and sales milestones. In addition, if the Company fails to file an investigational new drug application or foreign equivalent (“IND”) for the product within a certain period of time following the date of the agreement, the Company is required to remit to the inventor a fixed license fee annually as long as the requirement to file an IND remains unfulfilled. 10 Table of Contents EDESA BIOTECH, INC. Notes to Condensed Interim Consolidated Financial Statements (Unaudited) 6. Capital Shares Equity offerings On March 2, 2021, the Company closed an underwritten offering of 1,562,500 common shares, no par value, at a price to the public of $ 6.40 per share less underwriting discounts and commissions. Gross proceeds from the offering amounted to $ 10.0 million. The Company granted to the underwriters a 30-day option to purchase up to an additional 234,375 common shares, which expired with no further shares issued. On the closing date the Company issued underwriter warrants to purchase an aggregate of up to 109,375 common shares at an exercise price of $8.00 per share, expiring on February 26, 2026 . The direct costs related to the issuance of the common shares were $ 1.11 million. These direct costs were recorded as an offset against gross proceeds. The Company also recorded the fair value of underwriter warrants in the amount of $ 0.41 million as share-based compensation to non-employees under additional paid-in capital and an offset against gross proceeds. Equity distribution agreements On November 22, 2021, the Company entered into an equity distribution agreement with RBC Capital Markets, LLC (RBCCM), as sales agent. On December 28, 2021, the Company reset the size of the at-the-market equity offering program with RBCCM, such that the Company may offer and sell, from time to time, common shares having an aggregate offering price of up to $ 10.7 million in gross cash proceeds. RBCCM will use commercially reasonable efforts to sell the common shares from time to time, based upon the Company’s instructions. The Company has no obligation to sell any of the shares, and may at any time suspend sales under the distribution agreement or terminate the agreement in accordance with its terms. The total amount of cash that may be generated under this distribution agreement is uncertain and depends on a variety of factors, including market conditions and the trading price of the Company’s common shares. During the three months ended December 31, 2021, 223,396 common shares were sold under the distribution agreement, resulting in $ 1.29 million in gross proceeds. The commissions and direct costs of the offering program totaled approximately $ 0.06 million and were recorded as an offset against gross proceeds. 11 Table of Contents EDESA BIOTECH, INC. Notes to Condensed Interim Consolidated Financial Statements (Unaudited) Black-Scholes option valuation model The Company uses the Black-Scholes option valuation model to determine the fair value of share-based compensation for share options and compensation warrants granted and the fair value of warrants issued. Option valuation models require the input of highly subjective assumptions including the expected price volatility. The Company calculates expected volatility based on historical volatility of the Company’s share price. When there is insufficient data available, the Company uses a peer group that is publicly traded to calculate expected volatility. The Company adopted interest-free rates by reference to the U.S. treasury yield rates. The Company calculated the fair value of share options granted based on the expected life of 5 years, considering expected forfeitures during the option term of 10 years. Expected life of warrants is based on warrant terms. The Company did not and is not expected to declare any dividends. Changes in the subjective input assumptions can materially affect the fair value estimates, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s warrants and share options. Warrants A summary of the Company’s warrants activity is as follows: Number of Warrant Shares (#) Weighted Average Exercise Price Balance – September 30, 2020 992,721 $ 4.92 Issued 109,375 8.00 Exercised ( 381,650 ) 4.35 Balance – December 31, 2021 and September 30, 2021 720,446 $ 5.69 The weighted average contractual life remaining on the outstanding warrants at December 31, 2021 is 22 months. The following table summarizes information about the warrants outstanding at December 31, 2021: Number of Warrants (#) Exercise Prices Expiry Dates 28,124 $ 15.90 May 2023 563,685 $ 4.80 July 2023 7,484 $ 4.81 June 2024 11,778 $ 3.20 January 2025 109,375 $ 8.00 February 2025 720,446 12 Table of Contents EDESA BIOTECH, INC. Notes to Condensed Interim Consolidated Financial Statements (Unaudited) There were no warrants issued during the three months ended December 31, 2021 and 2020. Share Options The Company adopted an Equity Incentive Compensation Plan in 2019 (the “2019 Plan”) administered by the independent members of the Board of Directors, which amended and restated the 2017 Incentive Compensation Plan (the “2017 Plan”). Options, restricted shares and restricted share units are eligible for grant under the 2019 Plan. The number of shares available for issuance under the 2019 Plan is 849,946 including shares available for the exercise of outstanding options under the 2017 Plan. The Company's 2019 Plan allows options to be granted to directors, officers, employees and certain external consultants and advisers. Under the 2019 Plan, the option term is not to exceed 10 years and the exercise price of each option is determined by the independent members of the Board of Directors. Options have been granted under the 2019 Plan allowing the holders to purchase common shares of the Company as follows: Number of Options (#) Weighted Average Exercise Price Weighted Average Grant Date Fair Value Balance – September 30, 2020 675,437 $ 3.30 $ 2.56 Granted 1,145,000 6.21 4.65 Exercised ( 19,746 ) 2.10 1.35 Forfeited ( 22,566 ) 6.02 4.02 Expired ( 1,906 ) 102.49 101.12 Balance – September 30, 2021 1,776,219 $ 5.06 $ 3.79 Expired ( 214 ) 502.68 477.65 Balance – December 31, 2021 1,776,005 $ 5.00 $ 3.73 During the year ended September 30, 2021, the independent members of the Board of Directors granted a total of 112,000 options to new employees of the Company pursuant to the 2019 Plan. The options have a term of 10 years with vesting in equal proportions over 36 months beginning on the monthly anniversary of the grant date following 90 days of employment, and an exercise price equal to the Nasdaq closing price on the grant dates. In October 2020 and April 2021, the independent directors of the Board of Directors granted a total of 430,000 and 603,000 options, respectively, to directors, officers and employees of the Company pursuant to the 2019 Plan. The options have a term of 10 years and an exercise price equal to the Nasdaq closing price on the grant dates. Options for directors have monthly vesting in equal proportions over 12 months beginning on the grant date and options for officers and current employees have monthly vesting in equal proportions over 36 months beginning on the grant date. The weighted average contractual life remaining on the outstanding options at December 31, 2021 is 100 months. 13 Table of Contents EDESA BIOTECH, INC. Notes to Condensed Interim Consolidated Financial Statements (Unaudited) The following table summarizes information about the options under the 2019 Plan outstanding and exercisable at December 31, 2021: Number of Options (#) Exercisable at December 31, 2021 (#) Range of Exercise Prices Expiry Dates 238 238 $ 304.08 Dec 2022 3,499 3,499 $ 35.28 - 93.24 Sep 2023 - Mar 2025 296,403 296,403 C$ 2.16 Aug 2027 - Dec 2028 335,365 247,971 $ 3.16 Feb 2030 429,000 178,412 $ 7.44 - 8.07 Sep 2030 - Oct 2030 711,500 230,177 $ 5.25 - 5.65 Jan 2031 - Sep 2031 1,776,005 956,700 The fair value of options granted during the three months ended December 31, 2020 was estimated using the Black-Scholes option valuation model using the following assumptions: Three Months Ended December 31, 2020 Risk free interest rate 0.31 % Expected life 5 years Expected share price volatility 97.28 % Expected dividend yield 0.00 % There were no options granted during the three months ended December 31, 2021. The Company recorded $ 0.61 million and $ 0.72 million of share-based compensation expenses for the three months ended December 31, 2021 and 2020, respectively. As of December 31, 2021, the Company had approximately $ 1.57 million of unrecognized share-based compensation expense, which is expected to be recognized over a period of 35 months. 7. Reimbursement Grant Income and Receivable Reimbursement grant income for the Company’s federal grant with the Canadian government’s Strategic Innovation Fund (SIF) is recorded based on the claim period of eligible costs. At December 31, 2021, grant reimbursements receivable of $ 2,629,060 were included in accounts and other receivable. 8. Financial Instruments (a) Fair values The Company uses the fair value measurement framework for valuing financial assets and liabilities measured on a recurring basis in situations where other accounting pronouncements either permit or require fair value measurements. Fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 14 Table of Contents EDESA BIOTECH, INC. Notes to Condensed Interim Consolidated Financial Statements (Unaudited) The Company follows the fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs that reflect assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. There are three levels of inputs that may be used to measure fair value: · Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. · Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets and liabilities in markets that are not active. · Level 3 - Unobservable inputs for the asset or liability that are supported by little or no market activity. The carrying value of certain financial instruments such as cash and cash equivalents, accounts and other receivable, accounts payable and accrued liabilities approximates fair value due to the short-term nature of such instruments. (b) Interest rate and credit risk Interest rate risk is the risk that the value of a financial instrument might be adversely affected by a change in interest rates. The Company does not believe that the results of operations or cash flows would be affected to any significant degree by a significant change in market interest rates, relative to interest rates on cash and cash equivalents due to the short-term nature of these balances. The Company is also exposed to credit risk at period end from the carrying value of its cash and cash equivalents and accounts and other receivable. The Company manages this risk by maintaining bank accounts with Canadian Chartered Banks, U.S. banks believed to be credit worthy and money market mutual funds of U.S. government securities. The Company’s cash is not subject to any external restrictions. The Company assesses the collectability of accounts receivable through a review of the current aging, as well as an analysis of historical collection rates, general economic conditions and credit status of customers. Credit risk for reimbursement grant and HST refunds receivable are not considered significant since amounts are due from the Canadian government’s Strategic Innovation Fund (SIF) and the Canada Revenue Agency. (c) Foreign exchange risk The Company and its subsidiary have balances in Canadian dollars that give rise to exposure to foreign exchange (“FX”) risk relating to the impact of translating certain non-U.S. dollar balance sheet accounts as these statements are presented in U.S. dollars. A strengthening U.S. dollar will lead to a FX loss while a weakening U.S. dollar will lead to a FX gain. The Company has not entered into any agreements or purchased any instruments to hedge possible currency risks. At December 31, 2021, the Company and its Canadian subsidiary had assets denominated in Canadian dollars of approximately C$ 7.3 million and the U.S. dollar exchange rate as at this date was equal to 1.27 Canadian dollars. Based on the exposure at December 31, 2021, a 10% annual change in the Canadian/U.S. exchange rate would impact the Company’s loss and other comprehensive loss by approximately $575,000. (d) Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty raising liquid funds to meet commitments as they fall due. In meeting its liquidity requirements, the Company closely monitors its forecasted cash requirements with expected cash drawdown. 9. Loss per Share The Company had securities outstanding which could potentially dilute basic EPS in the future but were excluded from the computation of diluted loss per share in the periods presented, as their effect would have been anti-dilutive. 10. Related Party Transactions During the three months ended December 31, 2021 and 2020, the Company incurred rent expense of $ 0.2 million each period from a company controlled by the Company’s CEO. These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by both parties. 11. Subsequent Events Subsequent to December 31, 2021 and through January 28, 2021, 256,455 common shares were sold under the equity distribution agreement with RBCCM, resulting in $ 1.19 million in gross proceeds. 15 Table of Contents