Edesa Biotech, Inc. 10-Q

Item 1. Financial Statements Edesa Biotech, Inc. Condensed Interim Consolidated Balance Sheets December 31, 2022 September 30, 2022 Assets: Current assets: Cash and cash equivalents $ 8,270,207 $ 7,090,919 Accounts and other receivable 125,477 1,255,451 Prepaid expenses and other current assets 690,945 745,543 Total current assets 9,086,629 9,091,913 Non-current assets: Property and equipment, net 11,809 12,694 Long-term deposits 173,891 171,464 Intangible asset, net 2,255,899 2,281,192 Right-of-use assets 146,534 18,465 Total assets $ 11,674,762 $ 11,575,728 Liabilities and shareholders' equity: Current liabilities: Accounts payable and accrued liabilities $ 1,210,493 $ 2,121,802 Short-term right-of-use lease liabilities 69,911 18,975 Total current liabilities 1,280,404 2,140,777 Non-current liabilities: Long-term payables 44,280 43,662 Long-term right-of-use lease liabilities 76,622 - Total liabilities 1,401,306 2,184,439 Commitments (Note 5) Shareholders' equity: Capital shares Authorized unlimited common and preferred shares without par value Issued and outstanding: 19,353,351 common shares (September 30, 2022 - 16,662,014 ) 44,473,823 42,473,099 Additional paid-in capital 12,417,672 11,176,345 Accumulated other comprehensive loss ( 238,669 ) ( 213,602 ) Accumulated deficit ( 46,379,370 ) ( 44,044,553 ) Total shareholders' equity 10,273,456 9,391,289 Total liabilities and shareholders' equity $ 11,674,762 $ 11,575,728 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, 2022 December 31, 2021 Expenses: Research and development 1,357,338 3,951,046 General and administrative 1,020,967 1,210,677 Loss from operations ( 2,378,305 ) ( 5,161,723 ) Other income (loss): Reimbursement grant income - 780,257 Interest income 49,429 6,120 Foreign exchange loss ( 5,941 ) ( 3,331 ) 43,488 783,046 Net loss ( 2,334,817 ) ( 4,378,677 ) Exchange differences on translation ( 25,067 ) 31,849 Net comprehensive loss $ ( 2,359,884 ) $ ( 4,346,828 ) Weighted average number of common shares 18,387,980 13,351,547 Loss per common share - basic and diluted $ ( 0.13 ) $ ( 0.33 ) 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, 2022 December 31, 2021 Cash flows from operating activities: Net loss $ ( 2,334,817 ) $ ( 4,378,677 ) Adjustments for: Depreciation and amortization 27,197 29,752 Share-based compensation 333,675 609,278 Changes in working capital items: Accounts and other receivable 1,060,378 432,792 Prepaid expenses and other current assets 57,722 ( 186,584 ) Accounts payable and accrued liabilities ( 935,250 ) 285,825 Net cash used in operating activities ( 1,791,095 ) ( 3,207,614 ) Cash flows from investing activities: Purchase of property and equipment - ( 3,140 ) Net cash used in investing activities - ( 3,140 ) Cash flows from financing activities: Proceeds from issuance of common shares and warrants 3,027,496 1,287,167 Payments for issuance costs of common shares and warrants ( 115,721 ) ( 58,663 ) Net cash provided by financing activities 2,911,775 1,228,504 Effect of exchange rate changes on cash and cash equivalents 58,608 23,740 Net change in cash and cash equivalents 1,179,288 ( 1,958,510 ) Cash and cash equivalents, beginning of period 7,090,919 7,839,259 Cash and cash equivalents, end of period $ 8,270,207 $ 5,880,749 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 Month Ended December 31, 2022 Balance - September 30, 2022 16,662,014 $ 42,473,099 $ 11,176,345 $ ( 213,602 ) $ ( 44,044,553 ) $ 9,391,289 Issuance of common shares and warrants in equity offering 2,691,337 2,082,669 944,827 - - 3,027,496 Issuance costs - ( 81,945 ) ( 37,175 ) - - ( 119,120 ) Share-based compensation - - 333,675 - - 333,675 Net loss and comprehensive loss - - - ( 25,067 ) ( 2,334,817 ) ( 2,359,884 ) Balance - December 31, 2022 19,353,351 $ 44,473,823 $ 12,417,672 $ ( 238,669 ) $ ( 46,379,370 ) $ 10,273,456 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 offering 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 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. It operates under its wholly owned subsidiaries, Edesa Biotech Research, Inc., an Ontario, Canada corporation, and Edesa Biotech USA, Inc., a California, USA corporation. The Company’s common shares trade on The Nasdaq Capital Market in the United States under the symbol “EDSA”. 2. Basis of Presentation 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 unaudited 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, 2022, which was filed with the Securities and Exchange Commission (SEC) on December 16, 2022. The accompanying unaudited condensed interim consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated on 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, 2022 are not necessarily indicative of the results that may be expected for other interim periods or the fiscal year ending September 30, 2023. 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; 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 Company’s and its wholly owned subsidiary’s, Edesa Biotech USA, Inc., functional currency. The functional currency of the Company’s wholly owned subsidiary, Edesa Biotech Research, Inc., as determined by management, is Canadian dollars. 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. 7 Table of Contents 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 have been fully 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, 2022 September 30, 2022 The Constructs $ 2,529,483 $ 2,529,483 Less: accumulated amortization ( 273,584 ) ( 248,291 ) Total intangible assets, net $ 2,255,899 $ 2,281,192 Amortization expense amounted to $0.03 million for each of the three months ended December 31, 2022 and 2021. Total estimated future amortization of intangible assets for each fiscal year is as follows: Year Ending September 30, 2023 75,879 September 30, 2024 101,172 September 30, 2025 101,172 September 30, 2026 101,172 September 30, 2027 101,172 Thereafter 1,775,332 $ 2,255,899 4. Right-of-Use Lease with Related Party The Company leases facilities used for executive offices from a related company. The original lease expired in December 2022, and the Company executed a two-year extension through December 2024. The components of right-of-use lease cost were as follows: Three Months Ended December 31, 2022 December 31, 2021 Right-of-use lease cost, included in general and administrative on the Statements of Operations $ 18,898 $ 20,353 8 Table of Contents Lease terms and discount rates were as follows: December 31, 2022 September 30, 2022 Remaining lease term (months): 24 3 Estimated incremental borrowing rate: 9.2 % 6.5 % The future minimum lease payments under right-of-use leases at December 31, 2022 were as follows: Year Ending September 30, 2023 $ 59,911 September 30, 2024 79,881 September 30, 2025 19,970 Total lease payments 159,762 Less imputed interest 13,229 Present value of right-of-use lease liabilities 146,533 Present value included in current liabilities 69,911 Present value included in long-term liabilities $ 76,622 Cash flow information was as follows: Three Months Ended December 31, 2022 December 31, 2021 Cash paid for amounts included in the measurement of right-of-use lease liabilities, included in accounts payable and accrued liabilities on the Statements of Cash Flow. $ 18,899 $ 20,354 5. Commitments Research and other commitments The Company has commitments for contracted research organizations who perform clinical trials for the Company’s ongoing clinical studies and other service providers. Approximate aggregate future contractual payments at December 31, 2022 are as follows: Year Ending September 30, 2023 $ 1,889,000 September 30, 2024 373,000 September 30, 2025 47,000 September 30, 2026 35,000 September 30, 2027 11,000 $ 2,355,000 9 Table of Contents 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 is committed to payments of up to an aggregate amount of $ 356 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 milestone, royalty or sublicensing payments were made to the third party during the three months ended December 31, 2022 and 2021. 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 $18.4 million after deducting $0.14 million that is included in the commitments table above for the year ending September 30, 2023 . 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. A milestone payment of $ 0.06 million was made to the third party during the three months ended December 31, 2022 and no milestone payments were made during the three months ended December 31, 2021. No royalty or sublicensing payments were made to the third party during the three months ended December 31, 2022 and 2021. 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. A milestone payment of $ 0.03 million was made during the three months ended December 31, 2021 and no milestone payments were made during the three months ended December 31, 2022. The Company is committed to remaining payments of up to an aggregate amount of $ 69.1 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. 6. Capital Shares Equity offerings On November 2, 2022, the Company completed a private placement of units consisting of 2,691,337 common shares, Class A warrants to purchase up to an aggregate of 1,345,665 common shares and Class B warrants to purchase up to an aggregate of 1,345,665 common shares. Net proceeds from the offering were $ 2.91 million, which were allocated between the relative fair values of the common shares (using a fair value of $ 2.69 million) and the common share purchase warrants (using a total fair value of $ 1.22 million). The warrants became exercisable December 23, 2022. The Class A warrants have an exercise price of $ 1.50 per share and will expire on December 23, 2025 . The Class B warrants have an exercise price of $ 1.00 per share and will expire on December 23, 2023 . The warrants are considered contracts on the Company’s own shares and are classified as equity. On March 24, 2022, the Company completed a registered direct offering of 1,540,000 common shares, no par value, and pre-funded warrants to purchase up to an aggregate of 1,199,727 common shares. In a concurrent private placement, the Company issued common share purchase warrants to purchase an aggregate of up to 2,739,727 common shares. Net proceeds from the offering were $ 9.01 million, which were allocated between the relative fair values of the common shares and pre-funded warrants (using a total fair value of $ 5.87 million) and the common share purchase warrants (using a total fair value of 4.13 million). The common share purchase warrants were immediately exercisable at an exercise price of $ 3.52 per share and will expire on September 24, 2027 . The pre-funded warrants were immediately exercisable at an exercise price of $ 0.0001 per share and do not expire. The warrants are considered contracts on the Company’s own shares and are classified as equity. In connection with the offering, the Company issued warrants to purchase an aggregate of 191,780 common shares to certain affiliated designees of the placement agent as part of the placement agent’s compensation. The placement agent warrants are exercisable on or after March 24, 2022, at an exercise price of $ 4.5625 per share, and will expire on March 21, 2027 with a fair value of $ 0.41 million. Equity distribution agreements On November 22, 2021, the Company entered into an equity distribution agreement with RBC Capital Markets, LLC (RBCCM), as sales agent. Pursuant to the terms of the agreement, as amended March 4, 2022, the Company could offer and sell common shares through an at-the-market equity offering program having an aggregate offering price of up to $ 15.4 million. During the three months ended December 31, 2021, the Company sold a total of 223,396 common shares pursuant to the agreement for net proceeds of $ 1.23 million. The distribution agreement was terminated effective March 21, 2022. 10 Table of Contents 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 Three Months Ended December 31, 2022 Balance - September 30, 2022 3,651,953 $ 4.00 Issued 2,691,330 1.25 Balance -December 31, 2022 6,343,283 $ 2.84 Three Months Ended December 31, 2021 Balance - September 30, 2021 and December 31, 2021 720,446 $ 5.69 The weighted average contractual life remaining on the outstanding warrants at December 31, 2022 is 37 months. The following table summarizes information about the warrants outstanding at December 31, 2022: Number of Warrants (#) Exercise Prices Expiry Dates 28,124 $ 15.90 May 2023 563,685 $ 4.80 July 2023 1,345,665 $ 1.00 December 2023 7,484 $ 4.81 June 2024 11,778 $ 3.20 January 2025 109,375 $ 8.00 February 2025 1,345,665 $ 1.50 December 2025 191,780 $ 4.56 March 2027 2,739,727 $ 3.52 September 2027 6,343,283 11 Table of Contents The fair value of warrants granted during the three months ended December 31, 2022 was estimated using the Black-Scholes option valuation model using the following assumptions: Three Months Ended December 31, 2022 Class A Warrants Class B Warrants Risk free interest rate 4.54 % 4.76 % Expected life 3.14 years 1.14 years Expected share price volatility 90.73 % 89.70 % Expected dividend yield 0.00 % 0.00 % 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 prior plans. Options, restricted shares and restricted share units are eligible for grant under the 2019 Plan. At December 31, 2022, the total number of shares available for issuance is 2,625,951 including shares available for the exercise of outstanding options under the 2019 Plan. The remaining number of options available for grant at December 31, 2022 is 418,990. 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 granted for directors normally have monthly vesting in equal proportions over 12 months beginning on the grant date. Options granted for employees normally have monthly vesting in equal proportions over 36 months beginning on the grant date. Options granted for new employees normally have monthly vesting in equal proportions over 36 months beginning on the monthly anniversary of the grant date following 90 days of employment. 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 Three Months Ended December 31, 2022 Balance - September 30, 2022 2,203,699 $ 4.66 $ 3.42 Granted 3,500 0.96 0.71 Expired ( 238 ) 304.08 304.08 Balance - December 31, 2022 2,206,961 $ 4.61 $ 3.39 Three Months Ended December 31, 2021 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 12 Table of Contents During the three months ended December 31, 2022, the independent members of the Board of Directors granted 3,500 employee options 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 date. The weighted average contractual life remaining on the outstanding options at December 31, 2022 is 93 months. The following table summarizes information about the options under the 2019 Plan outstanding and exercisable at December 31, 2022: Number of Options (#) Exercisable at December 31, 2022 (#) Range of Exercise Prices Expiry Dates 3,499 3,499 $ 35.28 - 93.24 Sep 2023 - Mar 2025 296,403 296,403 $ 2.16 Aug 2027 - Dec 2028 323,976 311,897 C$ 3.16 Feb 2030 397,000 297,643 $ 7.44 - 8.07 Sep 2030 - Oct 2030 682,500 432,081 $ 5.25 - 5.65 Jan 2031 - Sep 2031 500,083 202,232 $ 2.94 - 3.71 Feb 2032 - Mar 2032 3,500 97 $ 0.96 Dec 2032 2,206,961 1,543,852 The fair value of options granted during the three months ended December 31, 2022 was estimated using the Black-Scholes option valuation model using the following assumptions: Three Months Ended December 31, 2022 Risk free interest rate 3.62 % Expected life 5 years Expected share price volatility 95.30 % Expected dividend yield 0.00 % The Company recorded $ 0.33 million and $ 0.61 million of share-based compensation expenses for the three months ended December 31, 2022 and 2021, respectively. As of December 31, 2022, the Company had $ 0.71 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, 2022, all grant reimbursements have been received. 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. 13 Table of Contents 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. 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. The fair value of lease obligations on right-of-use assets approximates carrying value due to a fixed lease rate, which represents market rate. (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 and terms, as well as an analysis of historical collection rates, general economic conditions and credit status of government agencies. 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, 2022, the Company and its Canadian subsidiary had assets denominated in Canadian dollars of approximately C$ 6.78 million and the U.S. dollar exchange rate at this date was equal to 1.355 Canadian dollars. Based on the exposure at December 31, 2022, a 10% annual change in the Canadian/U.S. exchange rate would impact the Company’s loss and other comprehensive loss by approximately $0.5 million. (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 each of three months ended December 31, 2022 and 2021, the Company paid cash of $ 0.02 million for right of use lease 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. On December 31, 2022, the Company executed a two-year lease extension through December 31, 2024 in accordance with the terms of the original lease agreement. 11. Subsequent Events Subsequent to December 31, 2022 and through the date of this filing, 705,314 shares have been issued upon the exercise of Class A and Class B warrants with proceeds to the Company of $ 0.77 million. 14 Table of Contents