InMed Pharmaceuticals Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is subject to the safe harbor created by those sections. For more information, see “Cautionary Note Regarding Forward-Looking Statements.” When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that impact our business. In particular, we encourage you to review the risks and uncertainties described in “Risk Factors” in this Annual Report on Form 10-K. These risks and uncertainties could cause actual results to differ materially from those projected or implied by our forward-looking statements contained in this report. These forward-looking statements are made as of the date of this report, and we do not intend, and do not assume any obligation, to update these forward-looking statements, except as required by law. The following discussion and analysis should be read in conjunction with our consolidated financial statements for the year ended June 30, 2021, and the related notes thereto, which have been prepared in accordance with U.S. GAAP. Additionally, the following discussion and analysis should be read in conjunction with the audited consolidated financial statements included in this Form 10-K filing. Throughout this discussion, unless the context specifies or implies otherwise, the terms “InMed,” “we,” “us,” and “our” refer to InMed Pharmaceuticals Inc. All dollar amounts stated herein are in U.S. dollars unless specified otherwise. Overview We are a clinical stage pharmaceutical company developing a pipeline of prescription-based products targeting treatments for diseases with high unmet medical needs as well as developing proprietary manufacturing technologies. We are developing an integrated biosynthesis-based manufacturing approach, called IntegraSyn TM , for synthesizing pharmaceutical-grade cannabinoids, for potential use in product candidates. IntegraSyn TM , together with our prescription-based products are referred to as our “Product Candidates.” We are dedicated to delivering new therapeutic alternatives to patients who may benefit from cannabinoid-based pharmaceuticals. Our approach leverages on the several thousand years’ history of health benefits attributed to the Cannabis plant and brings this anecdotal information into the 21st century by applying tried, tested and true pharmaceutical drug development discipline and a scientific approach to establish non-plant-derived (synthetically manufactured), individual cannabinoid compounds as clinically proven, FDA-approved medicines. While our activities do not involve direct use of Cannabis nor extracts from the plant, we note that the U.S. Food and Drug Administration (“FDA”) has, to date, not approved any marketing application for Cannabis for the treatment of any disease or condition and has approved only one Cannabis-derived and three Cannabis-related drug products. Our APIs, which are the ingredients that give medicines their effects, are synthetically made and, therefore, we have no interaction with the Cannabis plant. We do not grow nor utilize Cannabis nor its extracts in any of our products; our products are applied topically (not inhaled nor ingested); and we do not utilize THC or CBD, the most common cannabinoid compounds that are typically extracted from the Cannabis plant, in any of our products. The API under development for our initial two drug candidates, INM-755 for epidermolysis bullosa (“EB”) and INM-088 for glaucoma, is cannabinol (“CBN”). Additional uses of both INM-755 and INM-088 are being explored, as well as the application of additional rare cannabinoids to treat diseases. We believe we are positioned to develop multiple product candidates in diseases which may benefit from medicines based on rare cannabinoid compounds. Most currently approved cannabinoid therapies are based specifically on cannabidiol (“CBD”) and/or tetrahydrocannabinol (“THC”) and are often delivered orally, which has limitations and drawbacks, such as side effects (including the intoxicating effects of THC). Currently, we intend to deliver our rare cannabinoid pharmaceuticals through various topical formulations, including through cream for dermatology and eye drops for ocular diseases, as a way of enabling treatment of the specific disease at the site of disease while seeking to minimize systemic exposure and any related unwanted systemic side effects, including any drug-drug interactions and any metabolism of the active pharmaceutical ingredient by the liver. THC and CBD can be obtained either from plant extraction or chemically synthesized. We plan to access rare cannabinoids via all non-extraction approaches, including our IntegraSyn TM approach, thus negating any interaction with or exposure to the Cannabis plant. Since our acquisition of Biogen Sciences Inc., a privately-held British Columbia pharmaceutical company focused on drug discovery and development of cannabinoids in 2014, our operations have focused on conducting research and development for our Product Candidates and for our integrated, biosynthesis-based manufacturing technology, establishing our intellectual property, organizing and staffing our company, business planning and capital raising. To date, we have funded our operations primarily through the issuance of common shares. 90 We have incurred significant operating losses since our inception and since the acquisition of Biogen Science Inc. and we expect to continue to incur significant operating losses for the foreseeable future. Our ability to generate product revenue, if ever, that is sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our drug candidates and/or our integrated, biosynthesis-based manufacturing technology. Our comprehensive loss was $9.8 million and $9.4 million for the year ended June 30, 2021 and 2020, respectively. As of June 30, 2021, we had an accumulated deficit of $74.9 million, which includes all losses since our inception in 1981. Our accumulated deficit increased between 2014, when we began focusing on the development of cannabinoid-derived pharmaceuticals following the acquisition of Biogen Science Inc., and June 30, 2021 by approximately $46.0 million. We expect our expenses and operating losses will increase substantially over the next several years in connection with our ongoing activities as we: ● continue to further advance the development of our IntegraSyn™ manufacturing approach; ● continue to further advance the INM-755 program, our lead drug candidate for the treatment of EB; ● continue to further advance the INM-088 program, our drug candidate for the treatment of glaucoma; ● investigate our Product Candidates for additional uses beyond the initial indications; ● pursue the discovery of drug targets for other diseases with high unmet medical needs and the subsequent development of any resulting new Product Candidates; ● seek regulatory approvals for any Product Candidates that successfully complete clinical trials; ● scale-up our manufacturing processes and capabilities, or arrange for a third party to do so on our behalf, to support our clinical trials of our Product Candidates and commercialization of any of our Product Candidates for which we obtain marketing approval; ● execute on business development activities, including but not limited to company mergers/acquisitions and acquisition or in-licensing of externally developed products and/or technologies; ● maintain, expand, enforce, defend and protect our intellectual property; ● hire additional clinical, quality control and scientific personnel; and ● add operational, financial and management information systems and personnel, including personnel to support our product development and potential future commercialization efforts and our operations as a public company. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including collaborations with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our Product Candidates or grant rights to external entities to develop and market our Product Candidates, even if we would otherwise prefer to develop and market such Product Candidates ourselves. Because of the numerous risks and uncertainties associated with drug development, we are unable to predict the timing or amount of increased expenses or the timing of when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. 91 Recent Developments On July 2, 2021, we closed a $12.0 million private placement. After deducting the placement agent fees and estimated offering expenses payable by us, we received net proceeds of approximately $11.0 million. On September 10, 2021, we entered into the Definitive Agreement to acquire BayMedica Inc., a private company based in the U.S. that specializes in the manufacturing and commercialization of rare cannabinoids. The Definitive Agreement follows a previously signed letter of intent announced on June 29, 2021. At closing of the transaction, we will issue 1.78 million common shares and certain warrants to BayMedica’s equity and convertible debt holders with any such issued common shares being subject to a six-month contractual hold period and the warrants being exercisable after six months. Closing of the transaction is subject to certain standard closing conditions. See “Business – Recent Development – Definitive Agreement to acquire BayMedica, Inc. ” Components of Results of Operations Revenue We have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products for several years, if at all. If our development efforts for our current or future Product Candidates are successful and result in marketing approval, we may generate revenue in the future from product sales. We cannot predict if, when or to what extent we will generate revenue from the commercialization and sale of our Product Candidates. We may never succeed in obtaining regulatory approval for any of our Product Candidates. We may also, in the future, conduct merger/acquisition activities with other company, or acquire or in-license externally developed products and/or technologies which may generate revenue. We may enter into license or collaboration agreements for our Product Candidates or intellectual property and we may generate revenue in the future from payments as a result of such license or collaboration agreements. Operating Expenses Research and Development and Patent Expenses Research and development and patent expenses represent costs incurred by us for the discovery, development, and manufacture of our Product Candidates and include: ● external research and development expenses incurred under agreements with contract research organizations, or “CROs”, contract development and manufacturing organization, or “CDMOs”, and consultants; ● salaries, payroll taxes, employee benefits expenses for individuals involved in research and development efforts; ● research supplies; and ● legal and patent office fees related to patent and intellectual property matters. We expense research and development costs as incurred. We recognize expenses for certain development activities, such as preclinical studies and manufacturing, based on an evaluation of the progress to completion of specific tasks using data or other information provided to us by our vendors. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of expenses incurred. Non-refundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. These amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered, or the services rendered. External costs represent a significant portion of our research and development expenses, which we track on a program-by-program basis following the nomination of a development candidate. Our internal research and development expenses consist primarily of personnel-related expenses, including salaries, benefits and stock-based compensation expense. We do not track our internal research and development expenses on a program-by-program basis as the resources are deployed across multiple projects. 92 The successful development of our Product Candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the remainder of the development of our Product Candidates. We are also unable to predict when, if ever, material net cash inflows will commence from our Product Candidates, if approved. This is due to the numerous risks and uncertainties associated with developing our Product Candidates, including the uncertainty related to: ● the timing and progress of preclinical and clinical development activities; ● the number and scope of preclinical and clinical programs we decide to pursue; ● our ability to raise additional funds necessary to complete preclinical and clinical development and commercialization of our Product Candidates and to advance the development of our biosynthesis-based manufacturing technology; ● our ability to maintain our current research and development programs and to establish new ones; ● our ability to establish licensing or collaboration arrangements; ● the progress of the development efforts of parties with whom we may enter into collaboration arrangements; ● the successful initiation and completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the FDA or any comparable foreign regulatory authority; ● the receipt and related terms of regulatory approvals from applicable regulatory authorities; ● the availability of raw materials and API for use in production of our Product Candidates; 93 ● our ability to secure manufacturing supply through relationships with third parties or establish and operate a manufacturing facility; ● our ability to consistently manufacture our Product Candidates in quantities sufficient for use in clinical trials; ● our ability to obtain and maintain intellectual property protection and regulatory exclusivity, both in the United States and internationally; ● our ability to maintain, enforce, defend and protect our rights in our intellectual property portfolio; ● the commercialization of our Product Candidates, if and when approved; ● our ability to obtain and maintain third-party payor coverage and adequate reimbursement for our Product Candidates, if approved; ● the acceptance of our Product Candidates, if approved, by patients, the medical community and third-party payors; ● competition with other products; and ● a continued acceptable safety profile of our products following receipt of any regulatory approvals. A change in the outcome of any of these variables with respect to the development of any of our Product Candidates would significantly change the costs and timing associated with the development of that product candidate, and potentially other candidates. Research and development activities account for a significant portion of our operating expenses. We expect our research and development expenses to increase significantly in future periods as we continue to implement our business strategy, which includes advancing our IntegraSyn™ manufacturing approach to commercial scale and our drug candidates into and through clinical development, expanding our research and development efforts, including hiring additional personnel to support our research and development efforts, and ultimately seeking regulatory approvals for our drug candidates that successfully complete clinical trials. In addition, drug candidates in later stages of clinical development generally incur higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. Accordingly, although we expect our research and development expenses to increase as our drug candidates advance into later stages of clinical development, we do not believe that it is possible at this time to accurately project total program-specific expenses through to commercialization. There are numerous factors associated with the successful commercialization of any of our Product Candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. General and Administrative Expenses General and administrative expenses consist of personnel-related costs, including salaries, benefits and stock-based compensation expense, for our personnel in executive, finance and accounting, human resources, business operations and other administrative functions, investor relations activities, legal fees related to corporate matters, fees paid for accounting and tax services, consulting fees and facility-related costs. We expect our general and administrative expenses will increase for the foreseeable future to support our expanded infrastructure and increased costs of expanding our operations and operating as a public company. These increases will likely include increased expenses related to accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums, and investor relations costs associated with operating as a public company. Amortization and Depreciation Intangible assets are comprised of intellectual property that we acquired in 2014 and 2015. The intellectual property is recorded at cost and is amortized on a straight-line basis over an estimated useful life of 18 years net of any accumulated impairment losses. Equipment and leasehold improvements are depreciated using the straight-line method based on their estimated useful lives. Share-based Payments Share-based payments is the stock-based compensation expense related to our granting of stock options to employees and others. The fair value, at the grant date, of equity-settled share awards is charged to our loss over the period for which the benefits of employees and others providing similar services are expected to be received. The vesting components of graded vesting employee awards are measured separately and expensed over the related tranche’s vesting period. The amount recognized as an expense is adjusted to reflect the number of share options expected to vest. The fair value of awards is calculated using the Black-Scholes option pricing model, which considers the exercise price, current market price of the underlying shares, expected life of the award, risk-free interest rate, expected volatility and the dividend yield. For more information, please see “Share-based Payments” under “Critical Accounting Policies and Significant Judgments and Estimates” below. 94 Derivative financial instruments We generally do not use derivative instruments to hedge exposures to cash-flow or market risks; however, certain warrants to purchase common stock that do not meet the requirements for classification as equity are classified as liabilities with attributable transaction costs recognized in the Statement of Operations. Such financial instruments are initially recorded at fair value with subsequent changes in fair value charged (credited) to operations in each reporting period. If these instruments subsequently meet the requirements for classification as equity, the Company reclassifies the fair value to equity. Other Income Other income consists primarily of interest income earned on our cash, cash equivalents and short-term investments. Results of Operations Comparison of the year ended June 30, 2021 and 2020 Year Ended June 30, 2021 2020 Change % Change (in thousands) Operating expenses: Research and development and patents $ 5,338 $ 5,811 $ (473 ) (8 %) General and administrative 4,479 3,227 1,252 39 % Amortization and depreciation 121 112 9 8 % Total operating expenses 9,938 9,150 788 9 % Interest income 16 130 (114 ) (88 %) Finance expense (360 ) - (360 ) nm Unrealized gain on derivative warrants liability 243 - 243 nm Foreign exchange (loss) gain (164 ) 81 (245 ) (302 %) Net loss $ (10,203 ) $ (8,939 ) $ (1,264 ) 14 % Research and Development and Patents Expenses Research and development and patents expenses decreased by $0.5 million, or 8%, for the year ended June 30, 2021 compared to the year ended June 30, 2020. The reduction in research and development and patents expenses was primarily due to decreased purchases of the active pharmaceutical ingredients used in INM-755 clinical trials. In addition, share-based payments were $0.3 million lower for the year ended June 30, 2021 while CRO expenditures increased by $0.2 million relative to the prior year. 95 General and administrative expenses General and administrative expenses increased by $1.3 million, or 39%, for the year ended June 30, 2021 compared to the year ended June 30, 2020. The increase results from a combination of changes including substantially higher insurance fees and higher personnel expenses, partially offset by lower share-based payments and lower investor relation expenses. Finance expense Finance expense is $0.4 million for the year ended June 30, 2021, compared to $Nil for the year ended June 30, 2020. Finance expense is comprised of financing transaction costs, from the November 2020 public offering, which were allocated to the derivative warrants liability. Unrealized gain of derivative warrants liability Unrealized gain of derivative warrants liability, which is the change in fair value of derivative warrants liability during the period, is $0.2 million for the year ended June 30, 2021, compared to $Nil for the year ended June 30, 2020. Foreign exchange loss Foreign exchange loss increased by $0.2 million compared to the year ended June 30, 2020. Foreign currency gains and losses arise as a result of holding non-Canadian denominated assets and liabilities for the six months ended December 31, 2020, when our functional currency was the Canadian dollar, and holding non-U.S. denominated assets and liabilities for the six months ended June 30, 2021 when our functional currency was the US dollar. Prior to January 1, 2021, our functional currency was the Canadian dollar and the presentation currency was the U.S. dollar. We reassessed our functional currency during the year and determined that the functional currency changed from the Canadian dollar to the U.S. dollar based on management’s analysis of the changes in the primary economic environment in which we operate. The change in functional currency is accounted for prospectively from January 1, 2021 and prior year financial statements have not been restated for the change in functional currency. Current Assets The increase in current assets year over year is primarily driven by increases in cash and cash equivalents, as well as prepaids and other assets. As at June 30, 2021, we had prepaids and other assets of $1.0 million, which is comprised primarily of prepaid insurance fees of $0.8 million and deferred financing fees of $0.1 million. As at June 30, 2020, we had prepaids and other assets of $0.4 million, which is comprised primarily of deferred financing fees of $0.1 million and insurance fees of less than $0.1 million. Liquidity and Capital Resources Since our inception, we have not generated any revenue from any product sales or any other sources and have incurred significant operating losses and negative cash flows from our operations. We have not yet commercialized any of our product candidates and we do not expect to generate revenue from sales of any Product Candidates for several years, if at all. We have funded our operations to date primarily with proceeds from the sale of common shares. As of June 30, 2021, we had cash and cash equivalents of $7.4 million. The following table summarizes our cash flows for each of the periods presented: (in thousands) Year Ended June 30, 2021 Year Ended June 30, 2020 Net cash used in operating activities $ (9,791 ) $ (7,375 ) Net cash provided by investing activities (2 ) 3,791 Net cash provided by financing activities 10,855 (31 ) Effects of foreign exchange on cash and cash equivalents 495 (416 ) Net increase (decrease) in cash and cash equivalents $ 1,557 $ (4,031 ) 96 Operating Activities During the year ended June 30, 2021, we used cash in operating activities of $9.8 million, primarily resulting from our net loss of $10.2 million combined with $0.5 million used in changes in our non-cash working capital, partially offset primarily by non-cash share-based compensation expenses and financing expenses allocated to warrants. Included in changes in non-cash working capital is $0.2 million of unrealized gain on derivative warrants representing the change in the fair value of derivative warrants liability. During the year ended June 30, 2020, we used cash in operating activities of $7.4 million, primarily resulting from our net loss of $8.9 million offset primarily by non-cash share-based compensation expenses and changes in our non-cash working capital. Investing Activities During the year ended June 30, 2021, we used cash in investing activities of less than $0.1 million, resulting from the purchase of property and equipment. During the year ended June 30, 2020, investing activities provided $3.8 million, consisting primarily of the net disposition of short-term investments to fund our operating activities. Financing Activities During the year ended June 30, 2021, cash provided by financing activities of $10.9 million consisted of $8.0 million of gross proceeds from our initial public offering and $4.5 million of gross proceeds from a private placement of our common shares, offset by total transaction costs of $1.6 million. During the year ended June 30, 2020, we used cash in financing activities of less than $0.1 million, resulting from transaction costs related to a public offering of our common shares. Funding Requirements We expect our expenses to increase substantially in connection with our ongoing research and development activities, particularly as we continue the research and development of and the clinical trials for our Product Candidates. In addition, we expect to incur additional costs associated with operating as a US-listed public company. As a result, we expect to incur substantial operating losses and negative operating cash flows for the foreseeable future. In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), we have evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. Through June 30, 2021, we have funded our operations primarily with proceeds from the sale of common stock. The Company has incurred recurring losses and negative cash flows from operations since its inception, including net losses of $10.2 million and $8.9 million for the year ended June 30, 2021 and 2020, respectively. In addition, the Company had an accumulated deficit of $74.9 million as of June 30, 2021. Our accumulated deficit increased between 2014, when we began focusing on the development of cannabinoid-derived pharmaceuticals following the acquisition of Biogen Science Inc., and June 30, 2021 by approximately $46.0 million and we expect to continue to generate operating losses for the foreseeable future. On July 2, 2021, we closed a $12.0 million private placement. Under the terms of the private placement, an aggregate of 4,036,327 common shares, or common share equivalents, and warrants to purchase up to an aggregate of 4,036,327 common shares were purchased, at an effective purchase price of $2.973 per common share and associated warrant. The warrants have an exercise price of $2.848 per share, are exercisable immediately and have a term of five years. After deducting the placement agent fees and estimated offering expenses payable by us, we received net proceeds of approximately $11.0 million. 97 As of the issuance date of the consolidated financial statements, we expect our cash and cash equivalents of $7.4 million as of June 30, 2021, combined with the net proceeds from the July 2, 2021 private placement, will be sufficient to fund our operating expenses and capital expenditure requirements into the second quarter of fiscal 2023. The future viability of the Company beyond that point is dependent on its ability to raise additional capital to finance its operations. In addition, there are a number of uncertainties in estimating our operating expenses and capital expenditure requirements including the impact of potential acquisitions. As a result, we have concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. We expect to continue to seek additional funding through equity financings, debt financings or other capital sources, including collaborations with other companies, government contracts or other strategic transactions. The Company may not be able to obtain financing on acceptable terms, or at all. The terms of any financing may adversely affect the holdings or the rights of our existing stockholders. Our funding requirements and timing and amount of our operating expenditures will depend largely on: ● the progress, costs and results of our Phase 2 clinical trial; ● the scope, progress, results and costs of discovery research, preclinical development, laboratory testing and clinical trials for our Product Candidates; ● the scope, progress, results and costs of development of our IntegraSyn™ manufacturing approach; ● the number of and development requirements for other Product Candidates that we pursue; ● the costs, timing and outcome of regulatory review of our Product Candidates; ● our ability to enter into contract manufacturing arrangements for supply of API and manufacture of our Product Candidates and the terms of such arrangements; ● the impact of any acquired, or in-licensed, externally developed product(s) and/or technologies; ● our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such arrangements; ● the costs and timing of future commercialization activities, including product manufacturing, sales, marketing and distribution, for any of our Product Candidates for which we may receive marketing approval; ● the amount and timing of revenue, if any, received from commercial sales of our Product Candidates for which we receive marketing approval; ● the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights and defending any intellectual property- related claims; ● expansion costs of our operational, financial and management systems and increases to our personnel, including personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a dual listed company; and ● the costs to obtain, maintain, expand and protect our intellectual property portfolio. 98 A change in the outcome of any of these, or other variables with respect to the development of any of our Product Candidates, could significantly change the costs and timing associated with the development of that Product Candidate. We will need to continue to rely on additional financing to achieve our business objectives. In addition to the variables described above, if and when any of our Product Candidates successfully complete development, we will incur substantial additional costs associated with regulatory filings, marketing approval, post-marketing requirements, maintaining our intellectual property rights, and regulatory protection, in addition to other commercial costs. We cannot reasonably estimate these costs at this time. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity or debt financings and collaboration arrangements. We currently have no credit facility or committed sources of capital. To the extent that we raise additional capital through the future sale of equity securities, the ownership interests of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common shareholders. If we raise additional funds through the issuance of debt securities, these securities could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts, and additional capital may not be available on reasonable terms, or at all. If we raise additional funds through collaboration arrangements or other strategic transactions in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or Product Candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate development or future commercialization efforts or grant rights to develop and market Product Candidates that we would otherwise prefer to develop and market ourselves. For a further discussion of the risks surrounding the Company’s access to capital, please see Item 1A, “Risk Factors” in this Annual Report. Off-Balance Sheet Arrangements During the periods presented we did not have, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. Critical Accounting Policies and Significant Judgments and Estimates We periodically review our financial reporting and disclosure practices and accounting policies to ensure that they provide accurate and transparent information relative to the current economic and business environment. As part of this process, we have reviewed our selection, application and communication of critical accounting policies and financial disclosures. Management has discussed the development and selection of the critical accounting policies with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the disclosure relating to critical accounting policies in this Management’s Discussion and Analysis. This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements included as part of this report, which have been prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and expenses incurred during the reported periods. We base estimates on our historical experience, known trends and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The full details of our accounting policies are presented in Note 2 of our audited consolidated financial statements for the year ended June 30, 2021. These policies are considered by management to be essential to understanding the processes and reasoning that go into the preparation of our financial statements and the uncertainties that could have a bearing on its financial results. The significant accounting policies that we believe to be most critical in fully understanding and evaluating our financial results are research and development costs and share based payments. Research & Development and Patents costs: Research and development and patents costs is a critical accounting estimate due to the magnitude and nature of the assumptions that are required to calculate third-party accrued and prepaid research and development expenses. Research and development costs are charged to expense as incurred and include, but are not limited to, personnel compensation, including salaries and benefits, services provided by CROs that conduct preclinical and clinical studies, costs of filing and prosecuting patent applications, and lab supplies. 99 The amount of expenses recognized in a period related to service agreements is based on estimates of the work performed using an accrual basis of accounting. These estimates are based on services provided and goods delivered, contractual terms and experience with similar contracts. We monitor these factors and adjust our estimates accordingly. Share-based payments : The fair value, at the grant date, of equity share awards is charged to income or loss over the period for which the benefits of employees and others providing similar services are expected to be received, generally the vesting period. The corresponding accrued entitlement is recorded in contributed surplus. The amount recognized as an expense is adjusted to reflect the number of share options expected to vest. The fair value of awards is calculated using the Black-Scholes option pricing model which considers the following factors: ● Exercise price ● Current market price of the underlying shares ● Expected life of the award ● Risk-free interest rate ● Expected volatility ● Dividend yield Management determines costs for share-based payments using market-based valuation techniques. The fair value of the market-based and performance-based share awards are determined at the date of grant using generally accepted valuation techniques. Assumptions are made and judgment used in applying valuation techniques. These assumptions and judgments include estimating the future volatility of the stock price based on historical volatility, expected dividend yield, forfeiture rates and corporate performance. For employee awards, we use the “simplified method” to determine the expected term of options. Under this method, the expected term represents the average of the vesting period and the contractual term. Such judgments and assumptions are inherently uncertain. Changes in these assumptions affect the fair value estimates. If we had made different judgments and assumptions than those described previously, the amount of our share-based payments expense, net loss and net loss per common shares amounts could have been materially different. Derivative financial instruments: Derivative financial instruments are initially recorded at fair value with subsequent changes in fair value charged (credited) to operations in each reporting period. Derivative warrants liabilities are re-valued each reporting period using the Black-Scholes option pricing model which, similar to equity share awards, considers the factors listed above with the related assumptions and judgements. Changes in these assumptions affect the fair value estimates. If we had made different judgments and assumptions than those used, the amount of our derivative warrants liability and resulting charges to operations, net loss and net loss per common shares amounts could have been materially different. We recorded a derivative warrants liability for the warrants issued in conjunction with our November 2020 public offering of our common shares as the warrants were priced in U.S. dollars while our functional currency was the Canadian dollar. On January 1, 2021, our functional currency changed from the Canadian dollar to the U.S. dollar resulting in a reclassification of the derivative warrants liability to additional paid-in capital. Contingent Liabilities In July 2020, in connection with the planned public offering of our common shares, two inadvertent disclosures of already publicly available information were made that may have exceeded the scope permissible under Rule 134 of the Securities Act, and thus may not be entitled to the “safe-harbor” provided by Rule 134. As a result, either of the two inadvertent disclosures could be determined to not be in compliance for a registered securities offering under Section 5 of the Securities Act. If either of the two inadvertent disclosures are determined by a court to be a violation by the Company of the Securities Act, the recipients of the inadvertent disclosures who purchased our common shares in the Company’s public offering may have a rescission right, which could require the Company to repurchase those shares at their original purchase price with interest or a claim for damages if the purchaser no longer owns the securities, for one year following the date of the possible violation. The Company could also incur considerable expenses if it were to contest any such claims. Consequently, a contingent liability may arise out of this possible violation of the Securities Act. The likelihood and magnitude of this potential contingent liability, if any, is not determinable at this time. 100 Going Concern Through June 30, 2021, we have funded our operations primarily with proceeds from the sale of common shares. We have incurred recurring losses and negative cash flows from operations since our inception, including net losses of $10.2 million and $8.9 million for the year ended June 30, 2021 and 2020, respectively. In addition, we have an accumulated deficit of $74.9 million as of June 30, 2021. Our accumulated deficit increased between 2014, when we began focusing on the development of cannabinoid-derived pharmaceuticals following the acquisition of Biogen Science Inc., and June 30, 2021 by approximately $46.0 million and we expect to continue to generate operating losses for the foreseeable future. As of the issuance date of the consolidated financial statements, we expect our cash and cash equivalents of $7.4 million as of June 30, 2021, combined with the net proceeds from the $12.0 million July 2, 2021 private placement, will be sufficient to fund our operating expenses and capital expenditure requirements into the second quarter of fiscal 2023. The future viability of the Company beyond that point is dependent on its ability to raise additional capital to finance its operations. In addition, there are a number of uncertainties in estimating our operating expenses and capital expenditure requirements including the impact of potential acquisitions. As a result, we have concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. We expect to seek additional funding through equity financings, debt financings or other capital sources, including collaborations with other companies, government contracts or other strategic transactions. We may not be able to obtain financing on acceptable terms, or at all. The terms of any financing may adversely affect the holdings or the rights of our existing shareholders. New Standards Applicable in the Reporting Period Credit losses In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), and subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-10 (collectively Topic 326), requires companies to measure credit losses on financial instruments measured at amortized cost applying an “expected credit loss” model based upon past events, current conditions and reasonable and supportable forecasts that affect collectability. Previously, companies applied an “incurred loss’ model for recognizing credit losses. This standard is effective for fiscal years beginning after December 14, 2019. The Company adopted this standard from July 1, 2020, which did not have a significant impact on its consolidated financial statements. Fair Value Measurement In August 2018, the FASB issued ASU 2018–13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU eliminate, add and modify certain disclosure requirements for fair value measurements as part of its disclosure framework project. The Company adopted ASU 2018-13 from July 1, 2020, which did not have a significant impact on its consolidated financial statements. Collaborative Arrangements In November 2018, the FASB issued ASU 2018–18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This ASU provides guidance that clarifies when certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer, and amends ASC 808 to refer to the unit-of-account guidance in ASC 606. The guidance specifically precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. The Company adopted ASU 2018-18 on July 1, 2020, which did not have a significant impact on its consolidated financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item. 101