InMed Pharmaceuticals Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Financial Statements of InMed Pharmaceuticals Inc. For the Year Ended June 30, 2021 Suite 310 – 815 West Hastings Street Vancouver, BC, Canada, V6C 1B4 Tel: +1-604-669-7207 F- 1 InMed Pharmaceuticals Inc. (Expressed in U.S. Dollars) June 30, 2021 INDEX Page Financial Statements ● Report of Independent Registered Public Accounting Firm F-3 ● Consolidated Balance Sheets F-4 ● Consolidated Statements of Operations and Comprehensive Loss F-5 ● Consolidated Statements of Shareholders’ Equity F-6 ● Consolidated Statements of Cash Flows F-7 ● Notes to the Consolidated Financial Statements F-8 - F-29 F- 2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors InMed Pharmaceuticals Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of InMed Pharmaceuticals Inc. (the Company) as of June 30, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for each of the years in the two-year period ended June 30, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2021, in conformity with U.S. generally accepted accounting principles. Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred recurring losses and negative cash flows and has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP Chartered Professional Accountants We have served as the Company’s auditor since 2017. Vancouver, Canada September 24, 2021 F- 3 InMed Pharmaceuticals Inc. CONSOLIDATED BALANCE SHEETS As at June 30, 2021 and 2020 Expressed in U.S. Dollars June 30, June 30, Note 2021 2020 $ $ ASSETS Current Cash and cash equivalents 7,363,126 5,805,809 Short-term investments 46,462 42,384 Accounts receivable 11,919 45,344 Prepaids and other assets 956,762 418,920 Total current assets 8,378,269 6,312,457 Non-Current Property and equipment, net 3 326,595 403,485 Intangible assets, net 4 1,061,697 1,086,655 Other assets 14,655 - Total Assets 9,781,216 7,802,597 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Accounts payables and accrued liabilities 5 2,134,878 1,607,303 Current portion of lease obligations 9 80,483 68,965 Total current liabilities 2,215,361 1,676,268 Non-current Lease obligations 9 189,288 248,011 Total Liabilities 2,404,649 1,924,279 Shareholders’ Equity Common shares, no par value, unlimited authorized shares: 8,050,707 (June 30, 2020 - 5,220,707 ) issued and outstanding 7 60,587,417 53,065,240 Additional paid-in capital 7, 8 21,513,051 17,764,333 Accumulated deficit ( 74,852,470 ) ( 64,649,381 ) Accumulated other comprehensive income (loss) 128,569 ( 301,874 ) Total Shareholders’ Equity 7,376,567 5,878,318 Total Liabilities and Shareholders’ Equity 9,781,216 7,802,597 Commitments and Contingencies (Note 13) Subsequent Events (Note 16) The accompanying notes form an integral part of these audited consolidated financial statements. F- 4 InMed Pharmaceuticals Inc. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS For the year ended June 30, 2021 and 2020 Expressed in U.S. Dollars Year Ended June 30 Note 2021 2020 $ $ Operating Expenses Research and development and patents 5,338,084 5,811,266 General and administrative 4,479,333 3,227,167 Amortization and depreciation 3, 4 120,866 112,429 Total operating expenses 9,938,283 9,150,862 Other Income (Loss) Interest income 16,017 129,526 Finance expense ( 360,350 ) - Unrealized gain on derivative warrants liability 6 242,628 - Foreign exchange (loss) gain ( 163,101 ) 82,187 Net loss for the period ( 10,203,089 ) ( 8,939,149 ) Other Comprehensive Loss Foreign currency translation gain (loss) 430,443 ( 419,838 ) Total comprehensive loss for the period ( 9,772,646 ) ( 9,358,987 ) Net loss per share for the year Basic and diluted 10 ( 1.52 ) ( 1.71 ) Weighted average outstanding common shares Basic and diluted 10 6,719,830 5,220,707 The accompanying notes form an integral part of these audited consolidated financial statements. F- 5 InMed Pharmaceuticals Inc. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the year ended June 30, 2021 and 2020 Expressed in U.S. Dollars Accumulated Other Additional Comprehensive Paid-in Accumulated Income (Loss) - Note Common Shares Capital Deficit Foreign Exchange Total # $    $    $    $    $ Balance June 30, 2019 5,220,707 53,065,240 16,769,932 ( 55,710,232 ) 117,964 14,242,904 Loss and comprehensive loss for the period - - - ( 8,939,149 ) ( 419,838 ) ( 9,358,987 ) Share-based compensation 8 - - 994,401 - - 994,401 Balance June 30, 2020 5,220,707 53,065,240 17,764,333 ( 64,649,381 ) ( 301,874 ) 5,878,318 Accumulated Other Additional Comprehensive Paid-in Accumulated (Loss) Income - Note Common Shares Capital Deficit Foreign Exchange Total # $ $ $ $ $ Balance June 30, 2020 5,220,707 53,065,240 17,764,333 ( 64,649,381 ) ( 301,874 ) 5,878,318 Public offering 7 1,780,000 6,052,000 - - - 6,052,000 Private placement 7 1,050,000 2,917,157 1,545,343 - - 4,462,500 Reclassification of warrants 6, 7 - - 1,763,980 - - 1,763,980 Share issuance costs 7 - ( 1,446,980 ) ( 170,798 ) - - ( 1,617,778 ) Loss and comprehensive income for the period - - - ( 10,203,089 ) 430,443 ( 9,772,646 ) Share-based compensation 8 - - 610,193 - - 610,193 Balance June 30, 2021 8,050,707 60,587,417 21,513,051 ( 74,852,470 ) 128,569 7,376,567 The accompanying notes form an integral part of these audited consolidated financial statements. F- 6 InMed Pharmaceuticals Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended June 30, 2021 and 2020 Expressed in U.S. Dollars Note 2021 2020 $ $ Cash provided by (used in): Operating Activities Net loss for the period ( 10,203,089 ) ( 8,939,149 ) Items not requiring cash: Amortization and depreciation 3, 4 120,866 112,429 Share-based compensation 8 610,193 994,401 Non-cash lease expense 107,828 89,816 Loss on disposal of assets 555 2,307 Received interest income on short-term investments 131 79,937 Unrealized gain on derivative warrants liability 6 ( 242,628 ) - Unrealized foreign exchange gain ( 445 ) - Payments on lease obligations ( 93,951 ) ( 72,522 ) Finance expense 360,350 - Changes in non-cash working capital: Prepaids and other assets ( 823,172 ) ( 126,560 ) Other non-current assets ( 14,161 ) - Accounts receivable 40,198 17,273 Accounts payable and accrued liabilities 346,685 467,392 Total cash used in operating activities ( 9,790,640 ) ( 7,374,676 ) Investing Activities Maturity of short-term investments - 3,876,269 Purchase of short-term investments - ( 43,619 ) Proceeds on disposal of property and equipment - 541 Purchase of property and equipment ( 1,725 ) ( 42,573 ) Total cash (used in) provided by investing activities ( 1,725 ) 3,790,618 Financing Activities Shares issued for cash 7 12,472,500 - Share issuance costs ( 1,617,778 ) ( 30,993 ) Total cash provided by (used in) financing activities 10,854,722 ( 30,993 ) Effects of foreign exchange on cash and cash equivalents 494,960 ( 416,353 ) Increase (decrease) in cash during the period 1,557,317 ( 4,031,404 ) Cash and cash equivalents beginning of the period 5,805,809 9,837,213 Cash and cash equivalents end of the period 7,363,126 5,805,809 See note 12 for Non-Cash Transactions The accompanying notes form an integral part of these audited consolidated financial statements. F- 7 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 1. NATURE OF BUSINESS AND FUTURE OPERATIONS InMed Pharmaceuticals Inc. (“InMed” or the “Company”) was incorporated in the Province of British Columbia on May 19, 1981 under the Business Corporations Act of British Columbia. InMed is a clinical stage pharmaceutical company specializing in the research and development of novel, cannabinoid-based therapies and a system for the manufacturing of pharmaceutical-grade cannabinoids. The Company’s shares are listed on the Nasdaq Capital Market (“Nasdaq”) under the trading symbol “INM”. InMed’s corporate office and principal place of business is located at #310 – 815 West Hastings Street, Vancouver, B.C., Canada, V6C 1B4. 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), the Company has 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, the Company has funded its 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 years ended June 30, 2021 and 2020, respectively. In addition, the Company had an accumulated deficit of $ 74.9 million as of June 30, 2021. The Company expects to continue to generate operating losses for the foreseeable future. As of the issuance date of these consolidated financial statements, the Company expects its cash and cash equivalents of $ 7.4 million as of June 30, 2021, combined with the approximate $ 11 million of net proceeds from a private placement which closed on July 2, 2021 (see Note 16), will be sufficient to fund its 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. As a result, the Company has concluded that there is substantial doubt about its ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. The Company expects 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 the Company’s existing stockholders. These consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will be able to meet its commitments, realize its assets and discharge its liabilities in the normal course. These consolidated financial statements do not reflect adjustments to the carrying values of assets and liabilities that would be necessary if the Company was unable to continue as a going concern and such adjustments could be material. 2. SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation These consolidated financial statements have been prepared in accordance with generally accepted accounting principles as applied in the United States (“US GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). F- 8 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 2. SIGNIFICANT ACCOUNTING POLICIES (cont’d) (b) Use of Estimates The preparation of financial statements in compliance with US GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities as of the balance sheet date, and the corresponding revenues and expenses for the periods reported. It also requires management to exercise judgment in applying the Company’s accounting policies. In the future, actual experience may differ from these estimates and assumptions. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to these consolidated financial statements are the estimate of useful life of intangible assets, the application of the going concern assumption, the impairment assessment for long-lived assets, and determining the fair value of share-based payments and warrants. COVID-19 impacts On March 11, 2020 the COVID-19 outbreak was declared a pandemic by the World Health Organization. The full extent to which the COVID-19 pandemic may directly or indirectly impact the Company’s business, results of operations and financial condition, including expenses, research and development costs and employee-related amounts, will depend on future developments that are evolving and highly uncertain, such as the duration and severity of outbreaks, including potential future waves or cycles, and the effectiveness of actions taken to contain and treat COVID-19. The Company considered the potential impact of COVID-19 when making certain estimates and judgments relating to the preparation of these consolidated financial statements. While there was no material impact to the Company’s consolidated financial statements as of and for the year ended June 30, 2021, the Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in a material impact to the Company’s consolidated financial statements in future reporting periods. (c) Basis of Consolidation These consolidated financial statements include the accounts of the Company and its subsidiaries, including inactive subsidiaries: Biogen Sciences Inc., Sweetnam Consulting Inc., and InMed Pharmaceutical Ltd. A subsidiary is an entity that the Company controls, either directly or indirectly, where control is defined as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. All inter-company transactions and balances including unrealized income and expenses arising from intercompany transactions are eliminated in preparing these consolidated financial statements. d) Foreign Currency The functional currency of the Company and its subsidiaries is the U.S. Dollar. These consolidated financial statements are presented in U.S. Dollars. References to “$” and “US$” are to United States (“U.S.”) dollars and references to “C$” are to Canadian dollars. F- 9 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 2. SIGNIFICANT ACCOUNTING POLICIES (cont’d) d) Foreign Currency (cont’d) Prior to January 1, 2021, the Company’s functional currency was the Canadian dollar and its presentation currency was the U.S. dollar. During the year, the Company reassessed its functional currency and determined that its 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 the Company operates. 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. As a result of the functional currency change, the Company reclassified the value of the derivative warrants liability to additional paid-in capital (see Note 6). For periods prior to January 1, 2021, the effects of exchange rate fluctuations on translating foreign currency monetary assets and liabilities into Canadian dollars were included in the statement of operations and comprehensive loss as foreign exchange gain/loss. Revenue and expense transactions were translated into the U.S. dollar reporting currency at the average exchange rate during the period, and assets and liabilities were translated at end of period exchange rates, except for equity transactions, which were translated at historical exchange rates. Translation gains and losses from the application of the U.S. dollar as the reporting currency while the Canadian dollar was the functional currency are included as part of the cumulative foreign currency translation adjustment, which is reported as a component of shareholders’ equity under accumulated other comprehensive loss. For periods commencing January 1, 2021, monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates in effect at the balance sheet date. Opening balances related to non-monetary assets and liabilities are based on prior period translated amounts, and non-monetary assets and non-monetary liabilities incurred after January 1, 2021 are translated at the approximate exchange rate prevailing at the date of the transaction. Revenue and expense transactions are translated at the approximate exchange rate in effect at the time of the transaction. Foreign exchange gains and losses are included in the statement of operations and comprehensive loss as foreign exchange gain (loss). (e) Cash and Cash Equivalents Cash and cash equivalents include cash-on-hand, demand deposits with financial institutions and other short-term, highly liquid investments with original maturities of three months or less when acquired that are readily convertible to known amounts of cash and subject to an insignificant risk of change in value. (f) Short-term Investments Short-term investments include fixed and variable rate guaranteed investment certificates, with terms greater than three months and less than twelve months. Guaranteed investment certificates are convertible to known amounts of cash and are subject to an insignificant risk of change in value. F- 10 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 2. SIGNIFICANT ACCOUNTING POLICIES (cont’d) (g) Deferred Financing Costs The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred financing costs until such financings are consummated. After consummation of the equity financing, these costs are recorded as a reduction to shareholders’ equity generated as a result of the offering. Should the in-process equity financing be abandoned, the deferred financing costs will be expensed immediately as a charge to operating expenses in the consolidated statements of operations and comprehensive loss. As of June 30, 2021, $ 112,074 of deferred financing costs were capitalized and recorded as other assets on the consolidated balance sheet (2020 - $ 290,688 ). (h) Property and Equipment, Net Equipment and leasehold improvements are recorded at cost, less accumulated depreciation and accumulated impairment losses. The initial cost of equipment and leasehold improvements comprises their purchase price. The useful lives of equipment and leasehold improvements are reviewed at least once per year. Equipment and leasehold improvements are depreciated using the straight-line method based on their estimated useful lives as follows: ● Computer equipment – 30 % per annum ● Leasehold improvements – lesser of initial lease term or useful life Equipment and leasehold improvements, acquired or disposed of during the year, are depreciated proportionately for the period they are in use. The right-of-use asset is initially measured based on the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, less any lease incentives received. The assets are depreciated to the earlier of the end of the useful life of the right-of-use asset or the lease term using the straight-line method as this most closely reflects the expected pattern of consumption of the future economic benefits. The lease term includes periods covered by an option to extend if the Company is reasonably certain to exercise that option. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain re-measurements of the lease liability (see Note 2t(i)). (i) Leases Arrangements are assessed upon inception to determine if it is a lease. To the extent it is determine that an arrangement represents a lease, it is classified as either an operating lease or a finance lease. Operating leases are capitalized on the consolidated balance sheet through a right-of-use (“ROU”) asset and a corresponding lease liability. ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent an obligation to make lease payments arising from the lease. (j) Intangible Assets, Net Intangible assets are comprised of acquired intellectual property, which consists of certain patents and technical know-how. 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. F- 11 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 2. SIGNIFICANT ACCOUNTING POLICIES (cont’d) (k) Impairment of Long-Lived Assets The Company assesses the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the long-lived asset is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset or assets. If carrying value exceeds the sum of undiscounted cash flows, the Company then determines the fair value of the underlying asset. Any impairment to be recognized is measured as the amount by which the carrying amount of the asset group exceeds the estimated fair value of the asset group. Assets classified as held for sale are reported at the lower of the carrying amount or fair value, less costs to sell. As of June 30, 2021 and 2020, the Company determined that there were no impaired assets and no assets were held-for-sale. (l) Financial Assets and Liabilities Financial Assets Financial assets are initially recognized at fair value, plus transaction costs that are directly attributable to their acquisition or issue and subsequently carried at amortized cost, using the effective interest rate method, less any impairment losses. No financial assets are or elected to be carried at fair value through profit or loss or where changes in fair value are recognized in the consolidated statements of operations and comprehensive loss in other comprehensive loss. Cash and cash equivalents are subsequently recognized at amortized cost, which approximates fair value. Short-term investments are subsequently recorded at cost plus accrued interest, which approximates fair value. Accounts receivable are reported at outstanding amounts, net of provisions for uncollectable amounts. The Company evaluates the recoverability of accounts receivable on a regular basis based upon various factors including payment history and collection experience on other accounts or events expected to affect future collections experience. Expected credit losses on our accounts receivable were immaterial as at June 30, 2021 and 2020. Financial Liabilities Financial liabilities, including accounts payable and accrued liabilities, are initially recognized at fair value net of any transaction costs directly attributable to the issuance of the instrument and subsequently carried at amortized cost using the effective interest rate method. This ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the consolidated balance sheet. Interest expense in this context includes initial transaction costs and premiums payable on redemption, as well as any interest or coupon payable while the liability is outstanding. To determine the fair value of financial instruments, the Company uses the fair value hierarchy for inputs used to measure fair value of financial assets and liabilities. This hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels: Level 1 (highest priority), Level 2, and Level 3 (lowest priority). F- 12 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 2. SIGNIFICANT ACCOUNTING POLICIES (cont’d) (l) Financial Assets and Liabilities (cont’d) Level 1 - Unadjusted quoted prices in active markets for identical instruments. Level 2 - Inputs other than quoted prices included within 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, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs). Level 3 - Inputs are unobservable and reflect the Company’s assumptions as to what market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available. Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. The Company’s financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable and accrued liabilities. The carrying value of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable and accrued liabilities, approximate their carrying values as at June 30, 2021 and 2020 due to their immediate or short-term maturities. (m) Income Taxes The Company records a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, it recognizes deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. The Company recognizes the deferred income tax effects of a change in tax rates in the period of the enactment. The Company records a valuation allowance to reduce its deferred tax assets to the net amount that management believes is more likely than not to be realized. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than fifty percent likely of being realized. The Company records interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. F- 13 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 2. SIGNIFICANT ACCOUNTING POLICIES (cont’d) (n) Earnings (Loss) Per Share Basic earnings (loss) per common share (“EPS”) is computed by dividing the net income or loss applicable to common shares of the Company by the weighted average number of common shares outstanding for the relevant period. Diluted earnings (loss) per common share (“Diluted EPS”) is computed by dividing the net income or loss applicable to common shares by the sum of the weighted average number of common shares issued and outstanding and all additional common shares that would have been outstanding, if potentially dilutive instruments were converted. If the conversion of outstanding stock options and warrants into common share is anti-dilutive, then diluted EPS is not presented separately from EPS. Diluted EPS for year-to-date (including annual) periods is based upon the weighted average of the incremental shares included in each interim period for the year-to-date period. (o) Share-based Payments The fair value, at the grant date, of equity-classified 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. The vesting components of graded vesting employee awards are measured separately and expensed over the related tranche’s vesting period. The corresponding accrued entitlement is recorded in additional paid-in capital. The amount recognized as an expense is adjusted to reflect the number of share options that 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. Starting July 1, 2018, the Company accounts for non-employee awards under the guidance provided under ASU 2018-07 and uses an expected term to value non-employee options on an award-by-award basis. The expected term of the Company’s employee stock options is determined using the simplified method and the Company estimates the forfeitures on the grant date for options issued. The expected term of the Company’s non-employee stock options is the contractual term of the options granted and the Company estimates the forfeitures on the grant date for options issued. (p) Research and Development Costs The Company conducts research and development programs and incurs costs related to these activities, including research and development personnel compensation, services provided by contract research organizations and lab supplies. Research and development costs, net of contractual reimbursements from development partners, are expensed in the periods in which they are incurred. (q) Patents and Intellectual Property Costs The costs of filing for patents and of prosecuting and maintaining intellectual property rights are expensed as incurred due to the uncertainty surrounding the drug development process and the uncertainty of future benefits. Patents and intellectual property acquired from third parties for approved products or where there are alternative future uses are capitalized and amortized over the remaining life of the patent. F- 14 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 2. SIGNIFICANT ACCOUNTING POLICIES (cont’d) (r) Government Grants Research grants are recognized as a recovery of related expenditures in the consolidated statement of operations and comprehensive loss when there is reasonable assurance that the Company will comply with the conditions attached to them and that the grants will be received. For research related grants, the Company only recognizes grant proceeds when the proceeds have been spent on research expenses. Grant amounts received in advance are recorded as deferred grant proceeds. (s) Segment reporting The Company’s operations consist of one operating segment related to the biopharmaceutical research and development of novel, cannabinoid-based therapies and a biosynthesis system for the manufacturing of pharmaceutical-grade cannabinoids. (t) Leases At inception of a contract, the Company assesses whether a contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The lease liability is initially measured as the present value of future lease payments excluding payments made at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses its incremental borrowing rate as the discount rate. The lease liability is measured at amortized cost using the effective interest method. It is re-measured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is re-measured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. The Company has lease arrangements that include both lease and non-lease components. The Company accounts for each separate lease component and its associated non-lease components as a single lease component for all of its asset classes. The Company has elected to apply the practical expedient to grandfather the assessment of which transactions are leases on the date of initial application, as previously assessed under Topic 840 Leases. The Company applied the definition of a lease under Topic 842 Leases to contracts effective for periods on or after July 1, 2019. The Company has elected to apply the practical expedient to exclude initial direct costs such as annual operating costs from the measurement of the right-of-use asset at the date of initial application. The Company has elected to apply the practical expedient not to recognize right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less. The lease payments associated with these leases is recognized as an expense on a straight- line basis over the lease term. F- 15 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 2. SIGNIFICANT ACCOUNTING POLICIES (cont’d) (t) Leases (cont’d) On commencement of the lease for its new office premises on July 1, 2019, the Company recognized right-of-use assets of $ 434,660 , a reduction of prepaids and advances of $ 48,827 and a lease liability of $ 385,057 . The impact of the adoption of this new standard is non-cash in nature and, as such, the Company does not anticipate a material impact on cash flows. (u) Financial Instruments with Characteristics of Liabilities and Equity In July 2017, the FASB issued ASU 2017–11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling interests with a Scope Exception . The ASU was issued to address the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. The ASU, among other things, eliminates the need to consider the effects of down round features when analyzing convertible debt, warrants and other financing instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The amendments are effective for fiscal years beginning after December 15, 2018, and should be applied retrospectively. The adoption of this standard had no impact on the Company’s consolidated financial statements. (v) Derivative financial instruments The Company generally does 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 consolidation statement of operations and comprehensive loss. 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. (w) New Standards Applicable in the Reporting Period i) 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. F- 16 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 2. SIGNIFICANT ACCOUNTING POLICIES (cont’d) (w) New Standards Applicable in the Reporting Period (cont’d) ii) 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 the its consolidated financial statements. iii) 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. 3. PROPERTY AND EQUIPMENT, NET Property and equipment consists of the following: June 30, 2021 June 30, 2020 $ $ Right of Use Asset (lease) 439,321 417,405 Equipment 66,888 62,853 Leasehold Improvements 42,986 40,160 Property and equipment 549,195 520,418 Less: accumulated depreciation ( 222,600 ) ( 116,933 ) Property and equipment, net 326,595 403,485 Depreciation expense on property, equipment and leasehold improvements for the year ended June 30, 2021 was $21,143 (2020 - $95,504). Depreciation expense related to the Right-of-Use Asset for the year ended June 30, 2021 was $76,165 (2020 - $70,661) and was recorded in general and administrative expenses. F- 17 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 4. INTANGIBLE ASSETS, NET Intangible assets consist of: June 30, 2021 June 30, 2020 $ $ Intellectual property 1,736,420 1,622,255 Less: accumulated amortization ( 674,723 ) ( 535,600 ) Intangible assets, net 1,061,697 1,086,655 The acquired 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. As at June 30, 2021, the acquired intellectual property had an estimated remaining useful life of approximately 11 years. Amortization expense on intangible assets for the year ended June 30, 2021 was $ 99,723 (2020- $ 87,586 ). Based upon the intangible assets held as at June 30, 2021, the Company expects amortization expense to be incurred over the next five years as follows: $ 2022 96,468 2023 96,468 2024 96,468 2025 96,468 2026 96,468 482,340 5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following: June 30, 2021 June 30, 2020 $ $ Trade payables 775,129 706,516 Accrued research and development expenses 309,901 193,119 Employee compensation, benefits and related accruals 880,207 536,231 Accrued general and administrative expenses 169,641 171,437 Accounts payable and accrued liabilities 2,134,878 1,607,303 F- 18 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 6. DERIVATIVE WARRANTS LIABILITY The warrants issued as part of the November 16, 2020 public offering of common shares and common share purchase warrants (see Note 7), in accordance with ASC Topic 480, Distinguishing Liabilities from Equity and ASC 815, Derivatives and Hedging , are derivative warrant liabilities given the currency of the exercise price was different from the Company’s functional currency. At inception, the derivative is measured, using the Black-Scholes pricing model, at fair value with subsequent changes in fair value recognized in unrealized gain or loss on derivative warrants liability. On January 1, 2021, the Company’s functional currency changed from the Canadian dollar to the U.S. dollar. As a result of the change in functional currency, the Company re-evaluated the treatment of the derivative warrants liability and determined it should be classified as an equity instrument. The Company reclassified the value of the derivative warrants liability at January 1, 2021 to additional paid-in capital. The reconciliation of changes in fair value for the year ended June 30, 2021 is presented in the following table: Year ended June 30, 2021 $ Derivative warrants liability, July 1, 2020 - Fair value of warrants issued 1,958,000 Unrealized gain included in net loss ( 242,628 ) Translation effect 48,608 Derivative warrants liability, December 31, 2020 1,763,980 Reclassification upon change of functional currency ( 1,763,980 ) Derivative warrants liability, June 30, 2021 - 7. SHARE CAPITAL AND RESERVES a) Authorized As at June 30, 2021, the Company’s authorized share structure consisted of: (i) an unlimited number of common shares without par value; and (ii) an unlimited number of preferred shares without par value. No preferred shares were issued and outstanding as at June 30, 2021 and 2020. The Company may issue preferred shares and may, at the time of issuance, determine the rights, preference and limitations pertaining to these shares. Holders of preferred shares may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding up of the Company before any payment is made to the holders of common shares. F- 19 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 7. SHARE CAPITAL AND RESERVES (cont’d) b) Common Shares During the year ended June 30, 2021, the Company completed the following: Transaction Description Number Issue Price Total Public offering 1,780,000 $ 4.50 $ 8,010,000 Allocated to Additional Paid-in Capital ( 1,958,000 ) 6,052,000 Share issuance costs - $ - $ ( 1,109,128 ) Transaction Description Number Issue Price Total Private placement 1,050,000 $ 4.25 $ 4,462,500 Allocated to Additional Paid-in Capital ( 1,545,343 ) 2,917,157 Share issuance costs - $ - $ ( 337,852 ) On November 16, 2020, the Company closed a public offering of its common shares and issued an aggregate of 1,780,000 common shares, together with accompanying warrants, for gross proceeds of $ 8,010,000 . Each common share was sold in the offering with one warrant to purchase one common share. Transaction costs were allocated proportionally between the common shares and the derivative warrants liability (see Note 6) with $ 1,109,128 allocated to common shares and charged to shareholders’ equity and the balance of $ 360,350 allocated to the warrants and charged to operations. On February 12, 2021, the Company closed a private placement of its common shares and issued an aggregate of 1,050,000 common shares, together with accompanying warrants, for gross proceeds of $ 4,462,500 . Each common share was sold in the offering with a warrant to purchase 0.66 of a common share. Transaction costs were allocated proportionally between common shares and additional paid-in capital with $ 337,852 allocated to common shares and the balance of $ 170,798 allocated to additional paid-in capital and both charged to shareholders’ equity. c) Share Purchase Warrants A total of 910,297 share purchase warrants issued in January 2018 and June 2018 expired in July 2019 and June 2020, respectively, and were exercisable in Canadian dollars (United States dollar amounts for exercise price and aggregate intrinsic value are calculated using prevailing rates as at June 30, 2020). Each warrant entitled the holders thereof the right to purchase one common share. On November 16, 2020, 1,780,000 warrants were issued with an exercise price of $ 5.11 per share, were immediately exercisable upon issuance, and expire 6 years following the date of issuance. On February 12, 2021, 693,000 warrants were issued with an exercise price of $ 4.85 per share, are exercisable 6 months following issuance, and expire 5.5 years following the date of issuance. F- 20 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 7. SHARE CAPITAL AND RESERVES (cont’d) d) Share Purchase Warrants (cont’d) The following is a summary of changes in share purchase warrants from July 1, 2019 to June 30, 2021: Number Weighted Average Share Price Weighted Average Share Price Aggregate Intrinsic Value Aggregate Intrinsic Value # C$ US$ C$ US$ Balance as at June 30, 2019 910,297 $ 41.25 $ 31.52 - - Expired ( 910,297 ) $ 41.25 $ 31.52 Balance as at June 30, 2020 - - - - - Granted 2,473,000 - $ 5.04 - - Balance as at June 30, 2021 2,473,000 - $ 5.04 - - e) Agents’ Warrants There are no agents’ warrants outstanding at June 30, 2021 and 2020. 8. SHARE-BASED PAYMENTS a) Option Plan Details On March 24, 2017, and as amended on November 20, 2020, the Company’s shareholders approved: (i) the adoption of a new stock option plan (the “Plan”) pursuant to which the Board of Directors may, from time to time, in its discretion and in accordance with the requirements of the TSX, grant to directors, officers, employees and consultants of the Company, non-transferable options to purchase common shares, provided that the number of common shares reserved for issuance will not exceed twenty percent ( 20 %) of the issued and outstanding common shares at the date the options are granted (on a non-diluted and rolling basis); and (ii) the application of the new stock option plan to all outstanding stock options of the Company that were granted prior to March 24, 2017 under the terms of the Company’s previous stock option plan. As at June 30, 2021, there were 493,387 (June 30, 2020 – 455,507 ) options available for future allocation pursuant to the terms of the Plan. The option price under each option shall be not be less than the closing price on the day prior to the date of grant. All options vest upon terms as set by the Board of Directors, either over time, typically 12 to 36 months, or upon the achievement of certain corporate milestones. Stock options granted prior to May 2021 were granted with Canadian dollar exercise prices (United States dollar amounts for weighted average exercise prices and aggregate intrinsic value are calculated using prevailing rates as at June 30, 2021). Commencing in May 2021, stock options are granted with United States dollar exercise prices. F- 21 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 8. SHARE-BASED PAYMENTS (cont’d) a) Option Plan Details (cont’d) The following is a summary of changes in outstanding options from July 1, 2020 to June 30, 2021: Weighted Average Exercise Price Number $ Balance as at June 30, 2019 599,090 13.48 Granted 52,728 6.44 Expired/Forfeited ( 63,183 ) 27.43 Balance as at June 30, 2020 588,635 10.81 Granted 361,250 3.08 Expired/Forfeited ( 37,879 ) 6.61 Balance as at June 30, 2021 912,006 8.61 b) Fair Value of Options Issued During the Period i) The weighted average fair value at grant date of options granted during the year ended June 30, 2021 was $ 1.96 per option (year ended June 30, 2020 - C$ 6.08 ). Assumptions used for options granted during the year ended June 30, 2021 included a weighted average risk-free interest rate of 0.27 % (year ended June 30, 2020 – 1.51 %), weighted average expected life of 3.2 years calculated using the Simplified Method for directors, officers and employees and the contractual life for consultants (year ended June 30, 2020 – 3.3 years), weighted average volatility factor of 105.88 % (year ended June 30, 2020 – 110.08 %), weighted average dividend yield of 0 % (year ended June 30, 2020 – 0 %) and a 5 % forfeiture rate (year ended June 30, 2020 – 5 %). ii) Expenses Arising from Share-based Payment Transactions Total expenses arising from share-based payment transactions recognized during the year ended June 30, 2021 were $ 610,193 (2020 - $ 994,401 ). $ 405,801 was allocated to general and administrative expenses (2020 - $ 499,326 ) and the remaining $ 204,392 was allocated to research and development expenses (2020 - $ 495,075 ). Unrecognized compensation cost at June 30, 2021 related to unvested options was $ 371,777 which will be recognized over a weighted-average vesting period of 1.5 years. 9. LEASE OBLIGATIONS On commencement of the lease for the Company’s new offices premises on July 1, 2019, the Company recognized right-of-use assets of $ 434,660 and a lease liability of $ 385,057 with no net impact on accumulated deficit. The following table lists the Company’s operating lease obligations recognized on commencement of the lease for the Company’s new offices premises at July 1, 2019. Lease obligations recognized as at July 1, 2019 $ 385,057 Discounted using the incremental borrowing rate at July 1, 2019 8 % Estimated annual variable lease payments not included in lease obligations $ 59,983 F- 22 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 9. LEASE OBLIGATIONS (cont’d) The Company is committed to minimum lease payments as follows: Maturity Analysis June 30, 2021 Less than one year $ 98,729 One to five years 213,713 More than five years - Total undiscounted lease liabilities $ 312,442 (1) (1) Excludes estimated variable operating costs of $ 63,334 on an annual basis through to August 31, 2024. 10. BASIC AND DILUTED LOSS PER SHARE Basic loss per share amounts are calculated by dividing the net loss for the period by the weighted average number of ordinary shares outstanding during the period. As the outstanding stock options and warrants are anti-dilutive, they are excluded from the weighted average number of common shares in the table below. 2021 2020 $ $ Net loss for the period ( 10,203,089 ) ( 8,939,149 ) Basic and diluted loss per share ( 1.52 ) ( 1.71 ) Weighted average number of common shares - basic and diluted 6,719,830 5,220,707 11. INCOME TAXES The following is a reconciliation of income taxes calculated at the combined Canadian federal and provincial income statutory corporate tax rate of 27.0 % (June 30, 2020 – 27.0 %) to the tax expense: 2021 2020 $ $ Net loss before taxes ( 10,203,089 ) ( 8,939,149 ) Income tax expense (recovery) at the statutory rate ( 2,754,834 ) ( 2,413,570 ) Increase (reduction) in income taxes resulting from: Change in valuation allowance 4,109,545 1,751,714 Permanent differences 99,490 268,733 Foreign exchange differences ( 1,074,000 ) 371,000 Share issuance cost capitalized in equity ( 390,685 ) - Other 10,484 22,123 Income tax expense (recovery) - - F- 23 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 11. INCOME TAXES (cont’d) Deferred tax assets and liabilities are as follows: 2021 2020 $ $ Non-capital losses 13,742,381 9,836,706 Property and equipment, net 1,004 - Financing costs 434,399 244,095 Lease liability 51,108 66,963 14,228,892 10,147,764 Intangible assets, net ( 181,845 ) ( 192,987 ) Property and equipment, net - ( 971 ) Lease obligations ( 77,612 ) ( 93,916 ) ( 259,457 ) ( 287,874 ) Net deferred tax asset 13,969,435 9,859,890 Valuation allowance ( 13,969,435 ) ( 9,859,890 ) - - A full valuation allowance has been applied against the net deferred tax assets because it is not more likely than not that future taxable income will be available against which the Company can utilize the benefits therefrom. As at June 30, 2021, the Company has non-capital loss carry-forwards of approximately $ 50,897,706 (June 30, 2020 - $ 36,432,246 ) available to offset future taxable income in Canada. These non-capital loss carryforwards begin to expire in 2026 . 12. NON-CASH TRANSACTIONS Investing and financing activities that do not have a direct impact on cash flows are excluded from the statements of cash flows. During the year ended June 30, 2021, the following transaction was excluded from the statement of cash flows: i) As at June 30, 2021, the Company has unpaid financing costs of $ 112,075 . During the year ended June 30, 2020, the following transaction was excluded from the statement of cash flows: ii) On January 14, 2019, the Company executed a lease for new office premises (see Note 9). On commencement of the lease, the Company recognized right-of-use assets of $ 434,660 and a lease liability of $ 385,057 . 13. COMMITMENTS AND CONTINGENCIES Pursuant to the terms of agreements with various contract research organizations, as at June 30, 2021, the Company is committed for contract research services and materials at a cost of approximately $ 3,989,619 . A total of $3,498,228 of these expenditures are expected to occur in the twelve months following June 30, 2021 and the balance of $491,391 in the following twelve-month period. F- 24 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 13. COMMITMENTS AND CONTINGENCIES (cont’d) Pursuant to the terms of a May 31, 2017 Technology Assignment Agreement between the Company and the University of British Columbia (“UBC”), the Company is committed to pay royalties to UBC on certain licensing and royalty revenues received by the Company for biosynthesis of certain drug products that are covered by the agreement. To date, no payments have been required to be made. Pursuant to the terms of a December 13, 2018 Collaborative Research Agreement with UBC in which the Company owns all right, title and interest in and to any intellectual property, in addition to funding research at UBC, the Company is committed to make a one-time payment upon filing of any PCT patent application arising from the research. To date, no payments have been required to be made. Pursuant to the terms of a November 1, 2018 Contribution Agreement with National Research Council Canada, as represented by its Industrial Research Assistance Program (NRC-IRAP), under certain circumstances contributions received, including the disposition of the underlying intellectual property developed in part with NRC-IRAP contributions, may become repayable. Short-term investments include guaranteed investment certificates with a face value of $ 46,391 (June 30, 2020 - $ 42,193 ) that are pledged as security for a corporate credit card. The Company has entered into certain agreements in the ordinary course of operations that may include indemnification provisions, which are common in such agreements. In some cases, the maximum amount of potential future indemnification is unlimited; however, the Company currently holds commercial general liability insurance. This insurance limits the Company’s liability and may enable the Company to recover a portion of any future amounts paid. Historically, the Company has not made any indemnification payments under such agreements and it believes that the fair value of these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations for any period presented. In July 2020, in connection with the IPO 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 of 1933, 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 of 1933. If either of the two inadvertent disclosures are determined by a court to be a violation by the Company of the Securities Act of 1933, the recipients of the inadvertent disclosures who purchased our common shares in the IPO 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 violation. The Company could also incur considerable expense if it were to contest any such claims. Consequently, a contingent liability may arise out of this possible violation of the Securities Act of 1933. The likelihood and magnitude of this contingent liability, if any, is not determinable at this time. Pursuant to a technology licensing agreement, the Company is committed to issue, subject to regulatory approval, up to 17,500 warrants to purchase 17,500 common shares upon the achievement of certain milestones. The exercise price of the warrants will be equal to the five-day VWAP of the common shares prior to each milestone achievement and the warrants will be exercisable for a period of three years for issuance date. From time to time, the Company may be subject to various legal proceedings and claims related to matters arising in the ordinary course of business. The Company does not believe it is currently subject to any material matters where there is at least a reasonable possibility that a material loss may be incurred. F- 25 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 14. FINANCIAL RISK MANAGEMENT The Company’s financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities and derivative warrants liability. The fair values of short-term investments, accounts receivable, and accounts payable and accrued liabilities approximate their fair values because of the short-term nature of these instruments. Cash and cash equivalents are measured at fair value using Level 1 inputs. The Company measured its derivative warrant liabilities at fair value on a recurring basis using level 3 inputs. The fair value of derivative warrant liabilities is determined using the Black-Scholes valuation model. The following assumptions were used to value the derivative warrant liabilities issued November 16, 2020; exercise price: $ 5.11 ; expected risk free interest rate: 0.45 %; expected annual volatility; 46.32 % expected life in years: 6.0 ; and expected annual dividend yield: $ Nil . Subsequently, the following assumptions were used to value the derivative warrant liabilities at December 31, 2020; exercise price: $ 5.11 ; expected risk free interest rate: 0.45 %; expected annual volatility: 45.32 %; expected life in years: 5.9 ; and expected annual dividend yield: $ Nil . The following table summarizes the fair values and carrying values of the Company’s financial instruments at June 30, 2021 and 2020: June 30, 2021 Level 1 Level 2 Total Financial assets Cash and cash equivalents 7,363,126 - 7,363,126 Short-term investments - 46,462 46,462 Accounts receivable - 11,919 11,919 Total financial assets 7,363,126 58,381 7,421,507 Financial liabilities Accounts payable and accrued Liabilities - 2,134,878 2,134,878 Total financial liabilities - 2,134,878 2,134,878 June 30, 2020 Level 1 Level 2 Total Financial assets Cash and cash equivalents 5,805,809 - 5,805,809 Short-term investments - 42,384 42,384 Accounts receivable - 45,344 45,344 Total financial assets 5,805,809 87,728 5,893,537 Financial liabilities Accounts payable and accrued Liabilities - 1,607,303 1,607,303 Total financial liabilities - 1,607,303 1,607,303 F- 26 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 14. FINANCIAL RISK MANAGEMENT (cont’d) a) Market Risk: Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market prices are comprised of four types of risk: foreign currency risk, interest rate risk, commodity price risk and equity price risk. The Company does not currently have significant commodity price risk or equity price risk. Foreign Currency Risk : Foreign currency risk is the risk that the future cash flows or fair value of the Company’s financial instruments that are denominated in a currency that is not the Company’s functional currency (U.S. dollar) will fluctuate due to changes in foreign exchange rates. Portions of the Company’s cash and cash equivalents and accounts payable and accrued liabilities are denominated in Canadian dollars. Accordingly, the Company is exposed to fluctuations in the Euro and Canadian dollar exchange rates. As at June 30, 2021, the Company has a net excess of Canadian dollar denominated cash and cash equivalents in excess of Canadian dollar denominated accounts payable and accrued liabilities of C$ 1,532,950 which is equivalent to US$ 1,236,784 at the June 30, 2021 exchange rate. The Canadian dollar financial assets generally result from holding Canadian dollar cash to settle anticipated near-term accounts payable and accrued liabilities denominated in Canadian dollars. The Canadian dollar financial liabilities generally result from purchases of supplies and services from suppliers in Canada. Each change of 1 % in the Canadian dollar in relation to the U.S. dollar results in a gain or loss, with a corresponding effect on cash flows, of $ 12,368 based on the June 30, 2021 net Canadian dollar assets (liabilities) position. During the year ended June 30, 2021, the Company recorded foreign exchange gain of $ 80,713 (June 30, 2020 – $ Nil ) related to Canadian dollars. As at June 30, 2021, the Company has a net excess of Euros denominated accounts payable and accrued liabilities in excess of Euros denominated cash and cash equivalents of € 142,637 which is equivalent to US$ 169,153 at the June 30, 2021 exchange rate. The Euros financial assets generally result from holding Euro denominated account holdings to settle anticipated near-term accounts payable and accrued liabilities denominated in Euros. The Euros financial liabilities generally result from purchases of supplies and services from suppliers from outside of Canada. Each change of 1 % in the Euro in relation to the U.S. dollar results in a gain or loss, with a corresponding effect on cash flows, of $ 1,692 based on the June 30, 2021 net Euro assets (liabilities) position. During the year ended June 30, 2021, the Company recorded a foreign exchange gain of $ 27,428 (June 30, 2020 – $ 36,275 ) related to Euros. F- 27 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 14. FINANCIAL RISK MANAGEMENT (cont’d) a) Market Risk (cont’d): Interest Rate Risk: Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. As at June 30, 2021, holdings of cash and cash equivalents of $ 7,053,329 (June 30, 2020 - $ 4,307,407 ) are subject to floating interest rates. The balance of the Company’s cash holdings of $ 309,796 (June 30, 2020 - $ 1,498,402 ) are non-interest bearing. As at June 30, 2021, the Company held variable rate guaranteed investment certificates, with one-year terms, with face value of $ 46,391 (June 30, 2020 - $ 42,193 ). The Company’s current policy is to invest excess cash in guaranteed investment certificates or interest-bearing accounts of major Canadian chartered banks or credit unions with comparable credit ratings. The Company regularly monitors compliance to its cash management policy. The Company, as at June 30, 2021, does not have any borrowings. Interest rate risk is limited to potential decreases on the interest rate offered on cash and cash equivalents and short-term investments held with chartered Canadian financial institutions. The Company considers this risk to be immaterial. b) Credit Risk: Credit risk is the risk of financial loss to the Company if a customer or a counter party to a financial instrument fails to meet its contractual obligations. Financial instruments which are potentially subject to credit risk for the Company consist primarily of cash and cash equivalents and short-term investments. Cash and cash equivalents and short-term investments are maintained with financial institutions of reputable credit and may be redeemed upon demand. The carrying amount of financial assets represents the maximum credit exposure. Credit risk exposure is limited through maintaining cash and cash equivalents and short-term investments with high-credit quality financial institutions and management considers this risk to be minimal for all cash and cash equivalents and short-term investments assets based on changes that are reasonably possible at each reporting date. c) Liquidity Risk: Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company’s policy is to ensure that it has sufficient cash to meet its liabilities when they become due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation. A key risk in managing liquidity is the degree of uncertainty in the cash flow projections. If future cash flows are fairly uncertain, the liquidity risk increases. As at June 30, 2021, the Company has cash and cash equivalents and short-term investments of $ 7,409,588 (June 30, 2020 - $ 5,848,193 ), current liabilities of $ 2,215,361 (June 30, 2020 - $ 1,676,268 ) and a working capital surplus of $ 6,162,908 (June 30, 2020 - $ 4,636,189 ). F- 28 INMED PHARMACEUTICALS INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2021 AND 2020 (Expressed in U.S. Dollars) 15. TRANSACTIONS WITH RELATED PARTIES The Company did not enter into any transactions with related parties during the year ended June 30, 2021 and 2020. 16. SUBSEQUENT EVENTS On July 2, 2021, the Company announced it had closed a $ 12 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 the Company, the Company received net proceeds of approximately $ 11 million. On September 13, 2021, the Company announced that it has entered into a definitive agreement (“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. Closing of the transaction is subject to certain standard closing conditions. F- 29 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.