| SIGNIFICANT ACCOUNTING POLICIES | 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”).
(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. 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.
(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.
(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). 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.
(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.
(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. 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, 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)
ii) Fair
Value Measurement In
August 2018, the FASB issued ASU 2018–13, Fair Value Measurement (Topic 820)
iii) Collaborative
Arrangements In
November 2018, the FASB issued ASU 2018–18, Collaborative Arrangements (Topic 808) |
