The accompanying notes are an integral part of these condensed interim consolidated financial statements.
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
Notes to Condensed Interim Consolidated Financial Statements
(Unaudited)
1. Nature of Operations
Edesa Biotech, Inc. (the “Company” or “Edesa”) is a biopharmaceutical company focused on acquiring, developing and commercializing clinical-stage drugs for inflammatory and immune-related diseases with clear unmet medical needs. The Company is organized under the laws of British Columbia, Canada and is headquartered in Markham, Ontario, Canada.
The Company’s common shares trade on The Nasdaq Capital Market in the United States under the symbol “EDSA”.
Impact of COVID-19
The ongoing COVID-19 pandemic has severely impacted global economic activity and has caused material disruptions to almost every industry directly or indirectly. The full impact of the pandemic remains uncertain and ongoing developments related to the pandemic may cause material impacts to the Company’s future operations, clinical study timelines and financial results. While the full impact of the COVID-19 pandemic to business and operating results presents additional uncertainty, the Company’s management continues to use reasonably available information to assess impacts to the Company’s business plans and financial condition.
2. Basis of Preparation
The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q. They do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. GAAP for complete financial statements. These unaudited condensed interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended September 30, 2021, which was filed with the Securities and Exchange Commission (SEC) on December 28, 2021.
The accompanying unaudited condensed interim consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Edesa Biotech Research, Inc., an Ontario corporation, and Edesa Biotech USA, Inc., a California corporation in the U.S. All intercompany balances and transactions have been eliminated on consolidation. All adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the results of operations for the periods presented have been included in the interim periods. Operating results for the three and six months ended March 31, 2022 are not necessarily indicative of the results that may be expected for other interim periods or the fiscal year ending September 30, 2022.
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period or year. Actual results could differ from those estimates. Areas where significant judgment is involved in making estimates are valuation of accounts and other receivable; valuation and useful lives of property and equipment; intangible assets; right-of-use assets; deferred income taxes; the determination of fair value of share-based compensation; the determination of fair value of warrants in order to allocate proceeds from equity issuances; and forecasting future cash flows for assessing the going concern assumption.
Functional and reporting currencies
The consolidated financial statements of the Company are presented in U.S. dollars, unless otherwise stated, which is the functional currency of the Company and its U.S. subsidiary. The functional currency of the Company’s Canadian subsidiary, as determined by management, is Canadian dollars.
3. Intangible Assets
Acquired License
In April 2020, the Company entered into a license agreement with a pharmaceutical development company to obtain exclusive world-wide rights to know-how, patents and data relating to certain monoclonal antibodies (“the Constructs”), including sublicensing rights. Unless earlier terminated, the term of the license agreement will remain in effect for 25 years from the date of first commercial sale of licensed products containing the Constructs. Subsequently, the license agreement will automatically renew for five-year periods unless either party terminates the agreement in accordance with its terms.
Under the license agreement, the Company is exclusively responsible, at its expense, for the research, development, manufacture, marketing, distribution and commercialization of the Constructs and licensed products and to obtain all necessary licenses and rights. The Company is required to use commercially reasonable efforts to develop and commercialize the Constructs in accordance with the terms of a development plan established by the parties.
The Company has determined that the license has multiple alternative future uses in research and development projects and sublicensing in other countries or for other disease indications. The value of the acquired license is recorded as an intangible asset with amortization over the estimated useful life of 25 years and evaluation for impairment at the end of each reporting period.
The required upfront license payment of $2.5 million was paid by issuance of Series A-1 Convertible Preferred Shares which were subsequently converted to common shares. The value of the license includes acquisition legal costs. See Note 5 for license commitments.
Intangible assets, net consisted of the following:
| | March 31, 2022 | | | September 30, 2021 | |
| | | | | | |
The Constructs | | $ | 2,529,483 | | | $ | 2,529,483 | |
| | | | | | | | |
Less: accumulated amortization | | | (197,705 | ) | | | (147,119 | ) |
| | | | | | | | |
Total intangible assets, net | | $ | 2,331,778 | | | $ | 2,382,364 | |
Amortization expense amounted to $0.25 million for each of the three months ended March 31, 2022 and 2021 and $0.51 million for each of the six months ended March 31, 2022 and 2021.
Total estimated future amortization of intangible assets for each fiscal year is as follows:
Year Ending | | | |
September 30, 2022 | | $ | 50,586 | |
September 30, 2023 | | | 101,172 | |
September 30, 2024 | | | 101,172 | |
September 30, 2025 | | | 101,172 | |
September 30, 2026 | | | 101,172 | |
Thereafter | | | 1,876,504 | |
| | | | |
| | $ | 2,331,778 | |
4. Lease with Related Party
The Company leases facilities used for executive offices from a company controlled by the Company’s CEO for a six-year term through December 2022, with options to renew for another two-year term. The option period is not included in the right-of-use assets and related lease obligation.
The components of lease cost were as follows:
| | Three Months Ended | | | Six Months Ended | |
| | March 31, 2022 | | | March 31, 2021 | | | March 31, 2022 | | | March 31, 2021 | |
Operating lease cost, included in general and administrative on the Statements of Operations | | $ | 20,255 | | | $ | 20,253 | | | $ | 40,608 | | | $ | 39,941 | |
Lease terms and discount rates were as follows:
| | March 31, 2022 | | | September 30, 2021 | |
Remaining lease term (months): | | | 9 | | | | 15 | |
Estimated incremental borrowing rate: | | | 6.5 | % | | | 6.5 | % |
The approximate future minimum lease payments under operating leases at March 31, 2022 were as follows:
Year Ending | | | |
September 30, 2022 | | $ | 42,146 | |
September 30, 2023 | | | 21,073 | |
| | | | |
Total lease payment | | | 63,219 | |
Less imputed interest | | | 1,679 | |
| | | | |
Present value of lease liabilities, short-term | | $ | 61,540 | |
Cash flow information was as follows:
| | Six Months Ended | |
| | March 31, 2022 | | | March 31, 2021 | |
Cash paid for amounts included in the measurement of lease liabilities, included in accounts payable and accrued liabilities on the Statements of Cash Flows | | $ | 40,610 | | | $ | 39,942 | |
5. Commitments
Research and other commitments
The Company has commitments for contracted research organizations that perform clinical trials for the Company’s ongoing clinical studies, other service providers and the drug substance acquired in connection with a license agreement. Aggregate future contractual payments at March 31, 2022 are as follows:
Year Ending | | | |
September 30, 2022 | | $ | 3,871,000 | |
September 30, 2023 | | | 371,000 | |
September 30, 2024 | | | 75,000 | |
September 30, 2025 | | | 16,000 | |
| | | | |
| | $ | 4,333,000 | |
License and royalty commitments
In April 2020, through its Ontario subsidiary, the Company entered into a license agreement with a third party to obtain exclusive world-wide rights to certain know-how, patents and data relating to certain monoclonal antibodies (“the Constructs”), including sublicensing rights. An intangible asset for the acquired license has been recognized. See Note 3 for intangible assets. Under the license agreement, the Company recorded an expense of $3.5 million as a result of meeting a milestone during the three and six months ended March 31, 2021 and is committed to remaining payments of up to an aggregate amount of $352.5 million contingent upon meeting certain milestones outlined in the license agreement, primarily relating to future potential commercial approval and sales milestones. No milestone payments were made to the third party during the three and six months ended March 31, 2022. The Company also has a commitment to pay royalties based on any net sales of products containing the Constructs in the countries where the Company directly commercializes the products containing the Constructs and a percentage of any sublicensing revenue received by the Company and its affiliates in the countries where it does not directly commercialize the products containing the Constructs. No royalty or sublicensing payments were made to the third party during the three and six months ended March 31, 2022 and 2021.
In connection with this license agreement and pursuant to a purchase agreement entered into in April 2020, the Company acquired drug substance of one of the Constructs for an aggregate purchase price of $5.0 million, payable in two future installments based on the earlier of certain clinical trial progress or fixed dates. A payment of $2.5 million was made for the drug substance during the three and six months ended March 31, 2021. No payments for drug substance were made during the three and six months ended March 31, 2022.
The remaining purchase commitment is included in the table above for the year ending September 30, 2022.
In 2016, through its Ontario subsidiary, the Company entered into a license agreement with a third party to obtain exclusive rights to certain know-how, patents and data relating to a pharmaceutical product. The Company will use the exclusive rights to develop the product for therapeutic, prophylactic and diagnostic uses in topical dermal applications and anorectal applications. No intangible assets have been recognized under the license agreement with the third party. Under the license agreement, the Company is committed to payments of various amounts to the third party upon meeting certain milestones outlined in the license agreement, up to an aggregate amount of $18.6 million. Upon divestiture of substantially all of the assets of the Company, the Company shall pay the third party a percentage of the valuation of the licensed technology sold as determined by an external objective expert. The Company also has a commitment to pay the third party a royalty based on net sales of the product in countries where the Company, or an affiliate, directly commercializes the product and a percentage of sublicensing revenue received by the Company and its affiliates in the countries where it does not directly commercialize the product. No milestone, license or royalty payments were made to the third party during the three and six months ended March 31, 2022 and 2021.
In March 2021, through its Ontario subsidiary, the Company entered into a license agreement with the inventor of the same pharmaceutical product to acquire global rights for all fields of use beyond those named under the 2016 license agreement. The Company recorded an expense of $0.11 million as a result of meeting milestones outlined in the 2021 license agreement for the three months ended March 31, 2021 and $0.03 and $0.11 for the six months ended March 31, 2022 and 2021, respectively. No milestones were met during the three months ended March 31, 2022. The Company is committed to remaining payments of up to an aggregate amount of $68.9 million, primarily relating to future potential commercial approval and sales milestones. In addition, if the Company fails to file an investigational new drug application or foreign equivalent (“IND”) for the product within a certain period of time following the date of the agreement, the Company is required to remit to the inventor a fixed license fee annually as long as the requirement to file an IND remains unfulfilled.
6. Capital Shares
Equity offerings
On March 24, 2022, the Company completed a registered direct offering of 1,540,000 common shares, no par value, and pre-funded warrants to purchase up to an aggregate of 1,199,727 common shares. In a concurrent private placement, the Company issued common share purchase warrants to purchase an aggregate of up to 2,739,727 common shares. Aggregate gross proceeds to the Company were approximately $10.0 million.
The common share purchase warrants were immediately exercisable at an exercise price of $3.52 per share and will expire on September 24, 2027. The pre-funded warrants were immediately exercisable at an exercise price of $0.0001 per share and do not expire. In connection with the offering, the Company also issued warrants to purchase an aggregate of 191,780 common shares to certain affiliated designees of the placement agent as part of the placement agent’s compensation. The placement agent warrants are exercisable on or after March 24, 2022, at an exercise price of $4.5625 per share, and will expire on March 21, 2027.
The direct costs related to the issuance of the common shares and warrants were $0.99 million. These direct costs were recorded as an offset against gross proceeds. The warrants are considered contracts on the Company’s own shares and are classified as equity. The Company allocated gross proceeds with $5.87 million as the value of common shares and pre-funded warrants and $4.13 million as the value of common share purchase warrants under additional paid-in capital in the unaudited condensed interim consolidated statements of changes in shareholders’ equity on a relative fair value basis. The Company also recorded the fair value of underwriter warrants in the amount of $0.41 million as share-based compensation to non-employees under additional paid-in capital and an offset against gross proceeds.
On March 2, 2021, the Company closed an underwritten offering of 1,562,500 common shares, no par value, at a price to the public of $6.40 per share less underwriting discounts and commissions. Gross proceeds from the offering amounted to $10.0 million. The Company granted to the underwriters a 30-day option to purchase up to an additional 234,375 common shares, which expired with no further shares issued. On the closing date, the Company issued underwriter warrants to purchase an aggregate of up to 109,375 common shares at an exercise price of $8.00 per share, expiring on February 26, 2026. The direct costs related to the issuance of the common shares were $0.99 million. These direct costs were recorded as an offset against gross proceeds. The Company also recorded the fair value of underwriter warrants in the amount of $0.41 million as share-based compensation to non-employees under additional paid-in capital and an offset against gross proceeds.
Equity distribution agreements
On November 22, 2021, the Company entered into an equity distribution agreement with RBC Capital Markets, LLC (RBCCM), as sales agent. Pursuant to the terms of the agreement, as amended March 4, 2022, the Company could offer and sell common shares having an aggregate offering price of up to $15.4 million from time to time through RBCCM. For the six months ended March 21, 2022, the Company sold a total of 626,884 common shares pursuant to the agreement for gross proceeds of $2.94 million. The commissions and direct costs of the offering program totaled approximately $0.32 million and were recorded as an offset against gross proceeds. On March 21, 2022, the Company and RBCCM entered into an agreement terminating the agreement effective March 21, 2022.
Black-Scholes option valuation model
The Company uses the Black-Scholes option valuation model to determine the fair value of share-based compensation for share options and compensation warrants granted and the fair value of warrants issued. Option valuation models require the input of highly subjective assumptions including the expected price volatility. The Company calculates expected volatility based on historical volatility of the Company’s share price. When there is insufficient data available, the Company uses a peer group that is publicly traded to calculate expected volatility. The Company adopted interest-free rates by reference to the U.S. treasury yield rates. The Company calculated the fair value of share options granted based on the expected life of 5 years, considering expected forfeitures during the option term of 10 years. Expected life of warrants is based on warrant terms. The Company did not and is not expected to declare any dividends. Changes in the subjective input assumptions can materially affect the fair value estimates, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s warrants and share options.
Warrants
A summary of the Company’s warrant activity is as follows:
| | Number of Warrant Shares (#) | | | Weighted Average Exercise Price | |
Six Months Ended March 31, 2022 | | | | | | |
Balance – September 30, 2021 | | | 720,446 | | | $ | 5.69 | |
| | | | | | | | |
Issued | | | 2,931,507 | | | $ | 3.59 | |
| | | | | | | | |
Balance – March 31, 2022 | | | 3,651,953 | | | $ | 4.00 | |
| | | | | | | | |
Six Months Ended March 31, 2021 | | | | | | | | |
Balance – September 30, 2020 | | | 992,721 | | | $ | 4.92 | |
| | | | | | | | |
Issued | | | 109,375 | | | | 8.00 | |
Exercised | | | (341,806 | ) | | | 4.29 | |
| | | | | | | | |
Balance – March 31, 2021 | | | 760,290 | | | $ | 5.65 | |
The weighted average contractual life remaining on the outstanding warrants at March 31, 2022 is 56 months.
The following table summarizes information about the warrants outstanding at March 31, 2022:
Number of Warrants (#) | | | Exercise Prices | | | Expiry Dates | |
| 28,124 | | | $ | 15.90 | | | May 2023 | |
| 563,685 | | | $ | 4.80 | | | July 2023 | |
| 7,484 | | | $ | 4.81 | | | June 2024 | |
| 11,778 | | | $ | 3.20 | | | January 2025 | |
| 109,375 | | | $ | 8.00 | | | February 2025 | |
| 191,780 | | | $ | 4.56 | | | March 2027 | |
| 2,739,727 | | | $ | 3.52 | | | September 2027 | |
| 3,651,953 | | | | | | | | |
The fair value of warrants granted during the three and six months ended March 31, 2022 and 2021 was estimated using the Black-Scholes option valuation model using the following assumptions:
| | Six Months Ended March 31, 2022 | | | Six Months Ended March 31, 2021 | |
| | Common Warrants | | | Placement Agent Warrants | | | Underwriter Warrants | |
| | | | | | | | | |
Risk free interest rate | | | 2.37 | % | | | 2.37 | % | | | 0.67 | % |
Expected life | | 5.5 years | | | 5 years | | | 5 years | |
Expected share price volatility | | | 87.09 | % | | | 87.09 | % | | | 94.20 | % |
Expected dividend yield | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % |
Pre-funded Warrants
A summary of the Company’s pre-funded warrants activity is as follows:
| | Number of Pre-funded Warrant Shares (#) | |
| | | |
Six Months Ended March 31, 2022 | | | | |
Balance – September 30, 2021 | | | - | |
| | | | |
Issued | | | 1,199,727 | |
| | | | |
Balance – March 31, 2022 | | | 1,199,727 | |
There were no pre-funded warrants during the six months ended March 31, 2021.
Share Options
The Company adopted an Equity Incentive Compensation Plan in 2019 (the “2019 Plan”) administered by the independent members of the Board of Directors, which amended and restated the 2017 Incentive Compensation Plan (the “2017 Plan”). Options, restricted shares and restricted share units are eligible for grant under the 2019 Plan. The remaining number of options available for grant is 364,617. The total number of shares available for issuance is 2,625,951 including shares available for the exercise of outstanding options under the 2019 and 2017 Plans as described below.
The Company’s 2019 Plan allows options to be granted to directors, officers, employees and certain external consultants and advisers. Under the 2019 Plan, the option term is not to exceed 10 years and the exercise price of each option is determined by the independent members of the Board of Directors.
Options have been granted under the 2019 Plan allowing the holders to purchase common shares of the Company as follows:
| | Number of Options (#) | | | Weighted Average Exercise Price | | | Weighted Average Grant Date Fair Value | |
Six Months Ended March 31, 2022 | | | | | | | | | |
Balance – September 30, 2021 | | | 1,776,219 | | | $ | 5.06 | | | $ | 3.79 | |
| | | | | | | | | | | | |
Granted | | | 500,083 | | | | 3.66 | | | | 2.48 | |
Forfeited | | | (14,754 | ) | | | 6.48 | | | | 5.06 | |
Expired | | | (214 | ) | | | 502.68 | | | | 477.65 | |
| | | | | | | | | | | | |
Balance – March 31, 2022 | | | 2,261,334 | | | $ | 4.70 | | | $ | 3.45 | |
| | | | | | | | | | | | |
Six Months Ended March 31, 2021 | | | | | | | | | | | | |
Balance – September 30, 2020 | | | 675,437 | | | $ | 3.30 | | | $ | 2.56 | |
| | | | | | | | | | | | |
Granted | | | 450,000 | | | | 7.35 | | | | 5.84 | |
Exercised | | | (10,746 | ) | | | 2.44 | | | | 1.67 | |
Forfeited | | | (19,066 | ) | | | 6.07 | | | | 4.76 | |
Expired | | | (238 | ) | | | 768.60 | | | | 715.60 | |
| | | | | | | | | | | | |
Balance – March 31, 2021 | | | 1,095,387 | | | $ | 4.79 | | | $ | 3.96 | |
During the quarter ended March 31, 2022, the independent members of the Board of Directors granted a total of 415,083 options to employees of the Company pursuant to the 2019 Plan. The options have a term of 10 years with vesting in equal proportions over 36 months beginning on the monthly anniversary of the grant date (following 90 days of employment for new employees), and an exercise price equal to the Nasdaq closing price on the grant dates.
During the quarter ended March 31, 2022, the independent directors of the Board of Directors granted a total of 85,000 options, respectively, to directors of the Company pursuant to the 2019 Plan. The options have a term of 10 years and an exercise price equal to the Nasdaq closing price on the grant dates. Options for directors have monthly vesting in equal proportions over 12 months beginning on the grant date.
The weighted average contractual life remaining on the outstanding options at March 31, 2022 is 102 months.
The following table summarizes information about the options under the 2019 Plan outstanding and exercisable at March 31, 2022:
Number of Options (#) | | | Exercisable at March 31, 2022 (#) | | | Range of Exercise Prices | | | Expiry Dates | |
| 238 | | | | 238 | | | $ | 304.08 | | | Dec 2022 | |
| 3,499 | | | | 3,499 | | | $ | 35.28 - 93.24 | | | Sep 2023-Mar 2025 | |
| 296,403 | | | | 296,403 | | | C$ | 2.16 | | | Aug 2027-Dec 2028 | |
| 332,822 | | | | 266,482 | | | $ | 3.16 | | | Feb 2030 | |
| 418,452 | | | | 213,616 | | | $ | 7.44 - 8.07 | | | Sep 2030-Oct 2030 | |
| 709,837 | | | | 307,789 | | | $ | 5.25 - 5.65 | | | Jan 2031-Sep 2031 | |
| 500,083 | | | | 34,724 | | | $ | 2.94 - 3.71 | | | Feb 2032-Mar 2032 | |
| 2,261,334 | | | | 1,122,751 | | | | | | | | |
The fair value of options granted during the three and six months ended March 31, 2022 and 2021 was estimated using the Black-Scholes option valuation model using the following assumptions:
| | Six Months Ended March 31, 2022 | | | Six Months Ended March 31, 2021 | |
| | | | | | |
Risk free interest rate | | 1.71% - 2.54% | | | 0.31% - 0.90% | |
Expected life | | 5 years | | | 5 years | |
Expected share price volatility | | 85.91% - 86.59% | | | 94.27% - 97.28% | |
Expected dividend yield | | | 0.00% | | | | 0.00% | |
The Company recorded $0.63 million and $0.47 million of share-based compensation expenses for the three months ended March 31, 2022 and 2021, respectively and $1.24 million and $1.19 million for the six months ended March 31, 2022 and 2021.
As of March 31, 2022, the Company had approximately $2.16 million of unrecognized share-based compensation expense, which is expected to be recognized over a period of 34 months.
7. Reimbursement Grant Income and Receivable
Reimbursement grant income for the Company’s federal grant with the Canadian government’s Strategic Innovation Fund (SIF) is recorded based on the claim period of eligible costs. At March 31, 2022, grant reimbursements receivable of $1.1 million were included in accounts and other receivable.
8. Financial Instruments
(a) Fair values
The Company uses the fair value measurement framework for valuing financial assets and liabilities measured on a recurring basis in situations where other accounting pronouncements either permit or require fair value measurements.
Fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The Company follows the fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs that reflect assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
There are three levels of inputs that may be used to measure fair value:
| · | Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| | |
| · | Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets and liabilities in markets that are not active. |
| | |
| · | Level 3 - Unobservable inputs for the asset or liability that are supported by little or no market activity. |
The carrying value of certain financial instruments such as cash and cash equivalents, accounts and other receivable, accounts payable and accrued liabilities approximates fair value due to the short-term nature of such instruments. The fair value of lease obligations on right-of-use assets approximates carrying value due to a fixed lease rate, which represents market rate.
(b) Interest rate and credit risk
Interest rate risk is the risk that the value of a financial instrument might be adversely affected by a change in interest rates. The Company does not believe that the results of operations or cash flows would be affected to any significant degree by a significant change in market interest rates, relative to interest rates on cash and cash equivalents due to the short-term nature of these balances.
The Company is also exposed to credit risk at period end from the carrying value of its cash and cash equivalents and accounts and other receivable. The Company manages this risk by maintaining bank accounts with Canadian Chartered Banks, U.S. banks believed to be credit worthy and money market mutual funds of U.S. government securities. The Company’s cash is not subject to any external restrictions. The Company assesses the collectability of accounts receivable through a review of the current aging, as well as an analysis of historical collection rates, general economic conditions and credit status of customers. Credit risk for reimbursement grant and HST refunds receivable are not considered significant since amounts are due from the Canadian government’s Strategic Innovation Fund (SIF) and the Canada Revenue Agency.
(c) Foreign exchange risk
The Company and its subsidiary have balances in Canadian dollars that give rise to exposure to foreign exchange (“FX”) risk relating to the impact of translating certain non-U.S. dollar balance sheet accounts as these statements are presented in U.S. dollars. A strengthening U.S. dollar will lead to a FX loss while a weakening U.S. dollar will lead to a FX gain. The Company has not entered into any agreements or purchased any instruments to hedge possible currency risks. At March 31, 2022, the Company and its Canadian subsidiary had assets denominated in Canadian dollars of approximately C$5.3 million and the U.S. dollar exchange rate as at this date was equal to 1.2508 Canadian dollars. Based on the exposure at March 31, 2022, a 10% annual change in the Canadian/U.S. exchange rate would impact the Company’s loss and other comprehensive loss by approximately $425,000.
(d) Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty raising liquid funds to meet commitments as they fall due. In meeting its liquidity requirements, the Company closely monitors its forecasted cash requirements with expected cash drawdown.
9. Loss per Share
The Company had securities outstanding which could potentially dilute basic EPS in the future but were excluded from the computation of diluted loss per share in the periods presented, as their effect would have been anti-dilutive.
10. Related Party Transactions
The Company incurred rent expense of $0.20 million during each of the three months ended March 31, 2022 and 2021 and $0.41 million and $0.40 million for the six months ended March 31, 2022 and 2021, respectively from a company controlled by the Company’s CEO. These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by both parties.