InMed Pharmaceuticals Inc. — Fiscal Q1 2022 Form 10-Q
Reporting period: Three months ended September 30, 2022, compared with the three months ended September 30, 2021. The unaudited statements are presented in U.S. dollars under U.S. GAAP.
Business context
InMed is a clinical-stage pharmaceutical company developing rare cannabinoid and cannabinoid-analog therapies, including INM-755 for epidermolysis bullosa and INM-088 for glaucoma. Through wholly owned BayMedica, the company also sells bulk rare-cannabinoid products and develops cannabinoid manufacturing technologies.
Key financial metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Sales | $320,788 | $0 | New revenue from BayMedica |
| Cost of sales | $235,034 | $0 | New activity |
| Inventory write-down | $576,772 | $0 | Lower demand and pricing pressure |
| Gross loss | $491,018 | $0 | Gross margin approximately negative 153% |
| Research and development and patents | $1,378,653 | $1,491,252 | Down 8% |
| General and administrative | $1,560,477 | $1,372,867 | Up 14% |
| Total operating expenses | $2,988,178 | $2,892,651 | Up 3% |
| Net loss | $3,510,200 | $2,971,615 | Loss increased 18% |
| Basic and diluted loss per share | $4.06 loss | $6.17 loss | Improved due to higher share count |
| Cash used in operating activities | $2,255,543 | $2,653,917 | Use decreased 15% |
| Cash and cash equivalents at period end | $9,350,427 | $15,343,905 | Prior-year balance included substantial earlier financing proceeds |
Cash and short-term investments totaled $9.39 million at September 30, 2022. Current liabilities were $3.28 million, producing reported working capital of $8.26 million. Total liabilities were $3.58 million, consisting primarily of accounts payable, accrued liabilities, lease obligations, deferred revenue and a $500,000 acquisition consideration payable. The company reported no credit facility or committed source of capital.
Material changes versus the prior comparable period
- BayMedica contributed $320,788 of sales, $235,034 of cost of sales and $576,772 of inventory write-downs; BayMedica was acquired in October 2021 and therefore had no comparable 2021 revenue or expenses.
- The inventory write-down resulted from lower demand and downward pricing pressure and was the primary cause of the consolidated gross loss.
- InMed-segment research and development expense declined $411,000, or 28%, primarily because of reduced activity related to the INM-755 Phase 2 clinical trials.
- InMed-segment general and administrative expense declined approximately $280,000, while consolidated general and administrative expense increased because of BayMedica operations.
- On September 13, 2022, the company completed a $6.0 million private placement and received approximately $5.4 million of net cash proceeds after transaction costs. The financing included common shares or equivalents and seven-year investment options.
- Shares issued and outstanding increased from 650,667 at June 30, 2022 to 908,766 at September 30, 2022. The company also had 601,245 pre-funded warrants outstanding and 1,382,490 preferred investment options outstanding.
Outlook, risks and unusual items
- Management expects continuing operating losses and negative operating cash flows for the foreseeable future and has concluded that substantial doubt exists regarding the company’s ability to continue as a going concern within one year after issuance of the financial statements.
- Management estimated that the $9.4 million of cash at September 30, 2022 could fund operating expenses and capital requirements into the second half of fiscal 2023 and possibly into the first quarter of fiscal 2024, depending on BayMedica inventory sales and operating expenses.
- The company expects to seek additional equity, debt, collaboration, government-contract or strategic funding. Future equity financing could dilute existing shareholders, while debt or strategic transactions could impose restrictive terms or require relinquishing valuable rights.
- Management plans to refocus BayMedica on the core pharmaceutical business and expects to sell inventory on hand as of September 30, 2022 over approximately the following 15 months. BayMedica is also evaluating structured supply arrangements, collaborations and other strategic alternatives.
- Contractual commitments included approximately $2.39 million for contract research services and materials and $563,612 for vendor materials and equipment, primarily expected within the following 12 months.
- On October 13, 2022, $500,000 of escrow payments were made to BayMedica’s historical equity and convertible-debt holders. In October 2022, 341,226 pre-funded warrants were exercised for $34.
- Disclosure controls were not effective because of a material weakness in internal control over financial reporting related primarily to inadequate resources for non-routine financial reporting matters. Management began remediation using outside consultants and additional review procedures and expected remediation before the end of fiscal 2023.
- Customer concentration was significant: three customers accounted for 78% of Q1 FY2023 sales. The filing identifies clinical-development, regulatory, manufacturing, intellectual-property, financing, foreign-exchange and commercialization risks.
Investor verification items
- Verify the timing and economics of future BayMedica inventory sales, including whether demand and pricing pressure could cause additional write-downs.
- Reconcile cash runway assumptions with quarterly operating cash usage, contractual commitments and the timing of required additional financing.
- Track dilution from the 601,245 pre-funded warrants, 1,382,490 preferred investment options, other warrants and stock options.
- Monitor progress and spending on the INM-755 and INM-088 clinical programs and the company’s manufacturing technologies.
- Review remediation of the material weakness in internal controls and any impact on subsequent filings.
- Assess customer concentration, foreign-exchange exposure and the $500,000 acquisition consideration payable.