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 audited consolidated financial statements for the year
ended June 30, 2022, and the related notes thereto, which have been prepared in accordance with U.S. GAAP, included in our
Form 10-K filing. Throughout this discussion, unless the context specifies or implies otherwise the terms “InMed,”
“Company,” “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, including rare cannabinoids and novel
cannabinoid analogs, targeting the treatment of diseases with high unmet medical needs (“Product Candidates”). Together with
our subsidiary BayMedica, LLC, we also have significant know-how in developing proprietary manufacturing approaches to produce cannabinoids
for various market sectors (“Products”). Our know-how includes traditional approaches such as chemical synthesis and biosynthesis,
as well as a proprietary, integrated manufacturing approach called IntegraSynTM. We are dedicated to delivering new therapeutic
alternatives to patients and consumers who may benefit from cannabinoid-based products. 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 scientific approaches to establish non-plant-derived (synthetically manufactured), individual cannabinoid
compounds as Product Candidates in important market segments including clinically proven, FDA-approved medicines and Products that are
provided to wholesalers and end-product manufacturers. 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 ingredients 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 or Product Candidates; our current pharmaceutical drug Product
Candidates 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 or Product Candidates. The active pharmaceutical
ingredient (“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 novel cannabinoid analogs to treat diseases including but not limited to neurodegenerative diseases such as Alzheimer’s,
Parkinson’s, and Huntington’s.
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We
believe we are positioned to develop multiple pharmaceutical Product Candidates in diseases which may benefit from medicines based on
rare cannabinoid compounds. Most currently approved cannabinoid therapies are based specifically on CBD and/or 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 pharmaceutical drug candidates through various topical formulations (cream for dermatology, 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. The cannabinoid Products sold through our B2B raw material supply business are integrated into various product
formats by the companies who then further commercializes such products. We plan to access rare cannabinoids via all non-extraction approaches,
including chemical synthesis, biosynthesis and our proprietary integrated IntegraSynTM 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. On October 13, 2021, we acquired BayMedica, Inc., now named BayMedica, LLC (“BayMedica”). Upon closing
of the transaction, BayMedica became a wholly-owned subsidiary of InMed. To date, we have funded our operations primarily through the
issuance of common shares and limited Product revenues.
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 the success of our manufacturing technologies. Our net loss was $18.6 million and $10.2 million for the year ended
June 30, 2022 and 2021, respectively. As of June 30, 2022, we had an accumulated deficit of $93.5 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, 2022 by approximately $64.6 million. We expect our expenses
and operating losses will increase substantially over the next several years in connection with our ongoing activities as we:
● maintain, expand, enforce, defend and protect our intellectual property;
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As
a result of these activities as well as our working capital requirements, 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, if ever,
we expect to finance our operations through product sales, 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 Products and
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 Products and Product Candidates ourselves.
Because
of the numerous risks and uncertainties associated with drug development and commercial growth, we are unable to predict the timing or
amount of increased expenses and working capital requirements or the timing of when or if we will be able to achieve or maintain profitability.
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.
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 the Company, we received net proceeds of approximately $11.0 million.
On
September 30, 2021, we announced that we commenced our Phase 2 clinical trial of INM-755 (cannabinol) cream in the treatment of Epidermolysis
Bullosa (“EB”) marking the first time cannabinol has advanced to a Phase 2 Clinical trial to be studied as a therapeutic
option to treat a disease.
On
October 13, 2021, we completed the acquisition of BayMedica Inc. (“BayMedica”), a private company based in the U.S. that
specializes in the manufacturing and commercialization of rare cannabinoids. We acquired 100% of BayMedica in exchange for 82,000
common shares issued to BayMedica’s equity and convertible debt holders, subject to a six-month contractual hold period and $1
million to be held in escrow, subject to reduction for certain post-closing adjustments or satisfaction of indemnification claims
under the definitive agreement in the six- and twelve-month periods following the closing. On April 13, 2022, $300,457 of escrow
payments were made to BayMedica’s historical equity and convertible debt holders reflecting $199,543 of post-closing
reductions from the escrow. The remaining $500,000 escrow payment, subject to any additional post-closing adjustments, is payable on
the twelve-month anniversary following the closing.
We
announced the launch of B2B sales of the rare cannabinoid Products cannabicitran (“CBT”), cannabidivarin
(“CBDV”), and tetrahydrocannabivarin (“THCV”) on January 19, 2022, on April 21, 2022, and on June 9, 2022,
respectively.
On
April 7, 2022, we filed a prospectus supplement to our S-3 universal shelf filing to incorporate an At- The-Market-Offering Agreement
following which the Company sold 10,759 common shares under the agreement for proceeds of $0.1 million, net of issuance costs.
On
June 6, 2022, we closed a $5.5 million registered direct offering and concurrent private placement of our common shares. After deducting
the placement agent fees and transaction costs, we received net proceeds of approximately $4.5 million.
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On
September 13, 2022, we closed a $6.0 million private placement. Under the terms of the private placement, an aggregate of 691,245 common
shares, or common share equivalents, and investment options to purchase up to an aggregate of 1,382,490 common shares, at an effective
purchase price of $8.68 per common share and associated investment options. The warrants have an exercise price of $8.44 per share, are
exercisable immediately and have a term of seven years. After deducting the placement agent fees, we received net proceeds of approximately
$5.4 million.
Components
of Results of Operations
Revenue
Our revenue consists of manufacturing
and distribution sales of bulk rare cannabinoid Products, which are generally recognized at a point in time. The Company recognizes revenue
when control over the products have been transferred to the customer and the Company has a present right to payment.
Cost
of Sales
Cost
of sales consist primarily of the purchase price of goods and cost of services rendered, freight costs, warehousing costs, and purchasing
costs. Cost of sales also includes production and labor costs for our manufacturing business.
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 Products and
Product Candidates and include:
● research supplies; and
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.
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The
successful development of our Products and 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 or to develop and commercialize additional Products. 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 development,
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 establish sales, licensing or collaboration arrangements;
● competition with other products; and
A
change in the outcome of any of these variables with respect to the development of any of our Products or Product Candidates would significantly
change the costs and timing associated with the development of those Products or Product Candidates.
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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 drug candidates
and our manufacturing technologies into and through clinical development, expanding our research and development efforts, including hiring
additional personnel to support our research and development efforts, ultimately seeking regulatory approvals for our drug candidates
that successfully complete clinical trials, and further developing selected BayMedica activities. 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, operating
as a public company and increased costs of expanding our operations. 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 and trade secrets, product formulation knowledge, patents
and trademarks that we acquired in October 2021. The acquired intellectual property, patents and trademark are amortized on a straight-line
basis based on their estimated useful lives. Equipment and leasehold improvements are depreciated using the straight-line method based
on their estimated useful lives.
Impairment
of Long-Lived Assets
We
assess the recoverability of our 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, we then determine 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 as outlined in Note 6
to the consolidated financial statements. Assets classified as held for sale are reported at the lower of the carrying amount or
fair value, less costs to sell.
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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.
Other
Income
Other
income consists primarily of interest income earned on our cash, cash equivalents and short-term investments.
Results
of Operations
As
of the closing of the BayMedica acquisition, the Company aligned into two operating and reportable segments, InMed Pharmaceuticals (the
“InMed” segment) and BayMedica (the “BayMedica” segment).
Comparison
of the year ended June 30, 2022 and 2021 for InMed Segment
Year Ended June 30,
(in thousands)
Operating expenses:
Interest and other income 20 16 4 25 %
Unrealized gain on derivative warrants liability - 243 (243 ) -100 %
Warrant modification expense (1,314 ) - (1,314 ) nm
Research
and Development and Patents Expenses
Research
and development and patents expenses increased by $0.6 million in our InMed segment, or 12%, for the year ended June 30, 2022 compared
to the year ended June 30, 2021. The increase in research and development and patents expenses was primarily due to increased activities
related to the INM-755 Phase 2 clinical trials.
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General
and administrative expenses
General
and administrative expenses increased by $1.4 million in our InMed segment, or 32%, for the year ended June 30, 2022 compared to the
year ended June 30, 2021. The increase results primarily from a combination of changes including investor relation expenses, accounting
fees and legal fees, and substantially higher insurance fees resulting from our listing on the Nasdaq Capital Market. In addition, acquisition-related
expenses, which were comprised of regulatory, financial advisory and legal fees, totaled $0.2 million for the year ended June 30, 2022
and were included in general and administrative expenses in our InMed segment.
Finance
expense
Finance
expense is $Nil in our InMed segment for the year ended June 30, 2022, compared to $0.4 million for the year ended June 30, 2021. Finance
expense is comprised of financing transaction costs, from the November 2020 public offering, allocated to the derivative warrants liability.
Unrealized
gain of derivative warrants liability
Unrealized
gain of derivative warrants liability is $Nil in our InMed segment for the year ended June 30, 2022, compared to $0.2 million for the
year ended June 30, 2021, which is the change in fair value of derivative warrants liability during the end of the period.
Warrant
modification expense
Warrant
modification expense was $1.3 million in our InMed segment for the year ended June 30, 2022, compared to $Nil for the year ended June
30, 2021, which is the change in fair value of warrants that were re-priced during the year.
Foreign
exchange loss
Foreign
exchange loss decreased by less than $0.1 million in our InMed segment, or 28%, for the year ended June 30, 2022, compared to the year
ended June 30, 2021, as a consequence of holding non-US denominated assets and liabilities combined with fluctuations in foreign exchange
rates.
Comparison
of the year ended June 30, 2022 and 2021 for BayMedica Segment
Year Ended June 30,
(in thousands)
Operating expenses:
Research and development and patents 1,296 - 1,296 nm
General and administrative 961 - 961 nm
Amortization and depreciation 79 - 79 nm
Impairment of intangible assets and goodwill 3,473 - 3,473 nm
Total operating expenses 5,809 - 5,809 nm
Interest and other income 76 - 76 nm
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Sales,
Cost of Sales and Gross Profit
We
realized sales of $1.1 million in our BayMedica segment for the year ended June 30, 2022, the result of manufacturing and
distribution sales of bulk rare cannabinoid Products following the acquisition of BayMedica in October 2021. As the year ended June
30, 2021 pre-dated the acquisition of BayMedica, there are no comparable revenues for InMed in the 2021 period. Accordingly, we
realized cost of goods sold of $0.5 million in our BayMedica segment for the year ended June 30, 2022, with no comparable expenses
in 2021, resulting in a gross profit of $0.5 million for the period. As management has made
the decision to refocus on our core business in the pharmaceutical drug development area and reduce our efforts in BayMedica’s
commercial business, we do not expect sales to continue at the same rate. BayMedica will continue to evaluate opportunities for
potential structured supply arrangements and collaborations and will consider other potential strategic alternatives for the
commercial business.
Research
and Development and Patents Expenses
Research
and development and patents expenses were $1.3 million in our BayMedica segment for the year ended June 30, 2022. The increase in research
and development and patents expenses was due to the inclusion of BayMedica operating results following the acquisition date. There were
no comparable expenses in 2021.
General
and administrative expenses
General
and administrative expenses were $1.0 million in our BayMedica segment for the year ended June 30, 2022. The increase is due to the inclusion
of BayMedica operating results following the acquisition date. There were no comparable expenses in 2021.
Impairment
of intangible assets and goodwill
Impairment of intangible assets
and goodwill was $3.5 million in our BayMedica segment for the year ended June 30, 2022. For variety of reasons as outlined in Note 6
to the consolidated financial statements, performance of the BayMedica segment has not materialized as expected. As of June 30, 2022,
we determined that the respective fair value of the Company’s BayMedica reporting unit is less than its carrying amount, including
goodwill. As a result, we recorded a goodwill and intangible impairment loss. There were no comparable expenses in 2021.
Liquidity
and Capital Resources
Since
our inception, we have only generated limited revenue from Product sales, no sales from any other sources and have incurred significant
operating losses and negative cash flows from our operations. We have only commenced commercial sales with the acquisition of BayMedica
and 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, 2022, we had cash and cash equivalents of $6.2 million.
The
following table summarizes our cash flows for each of the periods presented:
(in thousands) Year Ended June 30, 2022 Year Ended June 30, 2021
Net cash used in operating activities $ (15,584 ) $ (9,791 )
Net cash used in investing activities (673 ) (2 )
Net cash provided by financing activities 15,071 10,855
Effects of foreign exchange on cash and cash equivalents - 495
Net increase (decrease) in cash and cash equivalents $ (1,186 ) $ 1,557
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Operating
Activities
During
the year ended June 30, 2022, we used cash in operating activities of $15.6 million, primarily resulting from our net loss of $18.6 million
combined with $2.7 million used in changes in our non-cash working capital, partially offset by non-cash share-based compensation expenses,
impairment of intangible assets and goodwill and warrant modification expense related to the change in fair value of warrants that were
re-priced during the year.
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 by non-cash share-based compensation expenses,
financing expenses allocated to warrants and changes in the valuation of the derivative warrants liability.
Investing
Activities
During the year ended June
30, 2022, cash used in investing activities of $0.7 million resulted from escrow payments made to BayMedica’s historical equity
and convertible debt holders, settlement of loan receivable from BayMedica and purchases of property and equipment, partially offset by
cash acquired from the acquisition of BayMedica.
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.
Financing
Activities
During the year ended June
30, 2022, cash provided by financing activities of $15.1 million consisted of $12.0 million of gross proceeds from a private placement
of our common shares and $5.0 million of gross proceeds from a registered direct offering and concurrent private placement of our common
shares, offset by total transaction costs of $1.8 million and $0.3 million for the repayment of debt assumed in the BayMedica acquisition.
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.
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 and associated with any required investment into BayMedica’s R&D
efforts targeting cannabinoid analogs. 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.
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Through
June 30, 2022, we have funded our operations primarily with proceeds from the sale of common stock. We have incurred recurring losses
and negative cash flows from operations since its inception, including net losses of $18.6 million and $10.2 million for the year ended
June 30, 2022 and 2021, respectively. In addition, we have an accumulated deficit of $93.5 million as of June 30, 2022. 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, 2022 by approximately $64.6 million and we expect to continue to generate operating losses for the
foreseeable future.
On
July 2, 2021, we closed a $12 million private placement. After deducting the placement agent fees and estimated offering expenses, we
received net proceeds of approximately $11 million.
In
April 2022, we filed a prospectus supplement to our S-3 universal shelf filing to incorporate an At The Market Offering Agreement following
which the Company sold 10,759 common shares under the agreement for net proceeds of approximately $0.1 million.
On
June 6, 2022, we closed a $5.5 million registered direct offering and concurrent private placement of our common shares. After deducting
the placement agent fees and transaction costs, we received net proceeds of approximately $4.5 million.
On
September 13, 2022, we closed a $6.0 million private placement. After deducting the placement agent fees, we received net proceeds of
approximately $5.4 million.
As of the issuance date of
the consolidated financial statements, we expect our cash and cash equivalents of $6.2 million as of June 30, 2022, combined with the
approximate $5.4 million of net proceeds from a private placement which closed on September 13, 2022, will be sufficient to fund our operating
expenses and capital expenditure requirements into the second half of fiscal 2023, and possibly into the first quarter of fiscal 2024
(being the third calendar quarter of 2023), depending on the level and timing of realizing revenues from the sale of BayMedica inventory
as well as the level and timing of the Company operating expenses. Our future viability is dependent on our ability to raise additional
capital to finance our 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. 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 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;
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● the costs, timing and outcome of regulatory review of our Product Candidates;
A
change in the outcome of any of these, or other variables with respect to the development of any of our Products and Product Candidates,
could significantly change the costs and timing associated with their development. 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 revenues from either our Products or Product Candidates, 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,
Products 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 Products or Product Candidates that we would otherwise prefer to develop and market ourselves.
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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 the revenue 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, 2022. 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.
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.
85
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, 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.
Impairment
of Intangible Assets:
We
assess the recoverability of our 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, we then determine 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.
Due
to the sector-wide underperformance of the current market and the uncertainty around the revenues in the health and wellness market,
the Company made the decision to focus on the core business in the pharmaceutical drug development and reduce our financial exposure
to the health and wellness sector. To make the transition we plan to focus sales efforts on reducing inventory and decreasing other
commercial manufacturing R&D efforts in BayMedica. As a result, as of June 30, 2022, the Company determined that intangibles
assets of BayMedica that were associated with manufacturing and commercialization of our health and wellness products were impaired.
Refer to Note 6 of our consolidated financial statements.
Business
Combination
Business
combinations are accounted for using the acquisition method. The fair value of total purchase consideration is allocated to the fair
values of identifiable tangible and intangible assets acquired and liabilities assumed, with the remaining amount being classified as
goodwill. All assets and liabilities acquired or assumed in a business combination are recorded at their fair values at the date of acquisition.
If the Company’s interest in the fair value of the acquiree’s net identifiable assets exceeds the cost of the acquisition,
the excess is recognized in earnings or loss immediately. Transaction costs that are incurred in connection with a business combination,
other than costs associated with the issuance of debt or equity securities, are expensed as incurred.
86
As part of our acquisition
of BayMedica Inc, on October 13, 2021, goodwill, trade secrets, product formulation knowledge, patents, trademarks, Technology and In-Process
Research and Development Intangible (“IPR&D”) intangible assets were recognized. The fair value of the aggregate
intangible assets was determined to be $2.7 million and goodwill was $2.0 million at the acquisition date. IPR&D was classified as
indefinite-lived and was not amortized. The multi-period excess earnings method was used to determine the fair value of these assets as
at the date of acquisition. All research and development costs incurred subsequent to the acquisition of IPR&D are expensed as incurred.
Patents are expected to have a finite life and are being amortized on a straight-line basis over their estimated useful lives. Amortization
begins when intangible assets with finite lives are put into use.
Going
Concern
Through
June 30, 2022, 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 $18.6 million and $10.2 million for the year ended
June 30, 2022 and 2021, respectively. In addition, we have an accumulated deficit of $93.5 million as of June 30, 2022. 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, 2022 by approximately $64.6 million and we expect to continue to generate operating losses for the
foreseeable future.
In
April 2022, we filed a prospectus supplement to our S-3 universal shelf filing to incorporate an At The Market Offering Agreement following
which the Company sold 10,759 common shares under the agreement for net proceeds of approximately $0.1 million.
On
June 6, 2022, we closed a $5.5 million registered direct offering and concurrent private placement and received net proceeds of approximately
$4.5 million.
On
September 13, 2022, we closed a $6.0 million private placement. After deducting the placement agent fees, we received net proceeds of
approximately $5.4 million.
As of the issuance date
of the consolidated financial statements, we expect our cash and cash equivalents of $6.2 million as of June 30, 2022, combined with
the approximate $5.4 million of net proceeds from a private placement which closed on September 13, 2022, will be sufficient to fund
our operating expenses and capital expenditure requirements into the second half of fiscal 2023, and possibly into the first quarter
of fiscal 2024 (being the third calendar quarter of 2023), depending on the level and timing of realizing revenues from the sale of
BayMedica inventory as well as the level and timing of the Company operating expenses. Our future viability is
dependent on our ability to raise additional capital to finance our 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.
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.
87
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated
Financial Statements of
InMed
Pharmaceuticals Inc.
For
the Year Ended June 30, 2022 and 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,
2022
INDEX Page
Financial Statements
● Report of Independent Registered Public Accounting Firm F-3
● Consolidated Balance Sheets F-5
● Consolidated Statements of Operations and Comprehensive Loss F-6
● Consolidated Statements of Shareholders’ Equity F-7
● Consolidated Statements of Cash Flows F-8
● Notes to the Consolidated Financial Statements F9-F-36
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