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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO

Commission File Number 001-41429

PROMIS NEUROSCIENCES INC.

(Exact name of Registrant as specified in its Charter)

Canada

    

98-0647155

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

Suite 200, 1920 Yonge Street

Toronto, Ontario

M4S 3E2

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: 416-847-6898

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Shares, no par value per share

PMN

The Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

    

    

Accelerated filer

    

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      No  

As of August 4, 2022, the registrant had 7,195,529 Common Shares outstanding.

Table of Contents

Table of Contents

 

Page 

PART I

FINANCIAL INFORMATION

3

Item 1.

Condensed Consolidated Financial Statements (unaudited)

3

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Operations and Comprehensive Loss

4

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit)

5

Condensed Consolidated Statements of Cash Flows

7

Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4.

Controls and Procedures

31

PART II

OTHER INFORMATION

31

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 3.

Defaults Upon Senior Securities

32

Item 4.

Mine Safety Disclosures

32

Item 5.

Other Information

32

Item 6.

Exhibits

33

Signatures

33

Table of Contents

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains statements that we believe are, or may be considered to be, “forward-looking statements.” Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on current beliefs, expectations or assumptions regarding the future of the business, future plans and strategies, operational results and other future conditions of the Company. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q regarding the prospects of our industry or our prospects, plans, financial position or business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking words such as “plans,” “expects” or “does not expect,” “is expected,” “look forward to,” “budget,” “scheduled,” “estimates,” “forecasts,” “will continue,” “intends,” “the intent of,” “have the potential,” “anticipates,” “does not anticipate,” “believes,” “should,” “should not,” or variations of such words and phrases that indicate that certain actions, events or results “may,” “could,” “would,” “might,” or “will,” “be taken,” “occur,” or “be achieved,” or the negative of these terms or variations of them or similar terms. Furthermore, forward-looking statements may be included in various filings that we make with the Securities and Exchange Commission (“SEC”) or press releases or oral statements made by or with the approval of one of our authorized executive officers. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements.

By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates and intentions expressed in such forward-looking statements. Risks, uncertainties and other factors which may cause the actual results, performance or achievements of ProMIS Neurosciences Inc. (the “Company”), as applicable, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information and statements include, but are not limited to, the risks described under the heading “Risk Factors Summary” and in Item 1A—“Risk Factors” in the Company’s Registration Statement on Form 10 filed with the SEC on June 22, 2022, as amended June 30, 2022 and July 1, 2022 (the “Form 10 Registration Statement”) as well as the risks described in Item 1A—“Risk Factors” in this Quarterly Report on Form 10-Q.

Readers are cautioned not to place undue reliance on any forward-looking statements contained in this Quarterly Report on Form 10-Q, which reflect management’s opinions only as of the date hereof. Except as required by law, we undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements. You are advised, however, to consult any additional disclosures we make in our reports to the SEC. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this Quarterly Report on Form 10-Q.

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PROMIS NEUROSCIENCES INC.

Condensed Consolidated Balance Sheets

(expressed in US dollars , unless otherwise indicated)

(Unaudited)

June 30, 

December 31, 

    

2022

    

2021

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash

$

8,903,776

$

16,943,905

Short-term investments

 

32,687

 

33,248

Prepaid expenses and other current assets

 

1,225,201

 

737,316

Total current assets

 

10,161,664

 

17,714,469

Property and equipment, net

 

2,776

 

4,671

Intangible assets, net

 

24,557

 

27,614

Total assets

$

10,188,997

$

17,746,754

Liabilities and Shareholders’ Equity

 

 

Current liabilities:

 

 

Accounts payable

$

888,015

$

408,981

Accrued liabilities

 

986,033

 

520,093

Total current liabilities

 

1,874,048

 

929,074

Convertible debt, net of issuance costs and debt discount

 

 

3,906,057

Derivative liability

 

 

5,379,878

Warrant liability

 

1,605,020

 

1,871,687

Total liabilities

 

3,479,068

 

12,086,696

Commitments and contingencies (Note 13)

 

  

 

  

Shareholders’ equity:

 

  

 

  

Series 1 Convertible Preferred Shares, no par value, 70,000,000 shares authorized, 70,000,000 and 0 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively

Common Shares, no par value, unlimited shares authorized, 7,195,529 shares issued and outstanding as of June 30, 2022 and December 31, 2021

 

 

Additional paid-in capital

 

73,879,455

 

68,039,178

Accumulated other comprehensive loss

 

(138,442)

 

(187,919)

Accumulated deficit

 

(67,031,084)

 

(62,191,201)

Total shareholders’ equity

 

6,709,929

 

5,660,058

Total liabilities and shareholders’ equity

$

10,188,997

$

17,746,754

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

Table of Contents

PROMIS NEUROSCIENCES INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(expressed in US dollars, except share and per share amounts)

(Unaudited)

For the

For the

For the

For the

Three Months Ended

Three Months Ended

Six Months Ended

Six Months Ended

June 30,

June 30,

June 30, 

June 30, 

    

2022

    

2021

    

2022

    

2021

Operating expenses:

 

  

 

  

Research and development

$

3,229,584

$

754,302

$

5,132,416

$

973,893

General and administrative

1,635,065

351,114

 

3,670,751

 

699,492

Total operating expenses

4,864,649

1,105,416

 

8,803,167

 

1,673,385

Loss from operations

(4,864,649)

(1,105,416)

 

(8,803,167)

 

(1,673,385)

Other income (expense):

 

 

Interest expense, net

(134,291)

(133,686)

 

(282,064)

 

(135,405)

Change in fair value of financial instruments

930,193

1,013,880

 

2,910,865

 

(4,523,685)

Gain on extinguishment of convertible debt and derivative liability

1,307,421

 

1,307,421

 

Other income/(expense)

16,288

(321)

 

27,062

 

(2,379)

Total other income (expense), net

2,119,611

879,873

3,963,284

(4,661,469)

Net loss

(2,745,038)

(225,543)

(4,839,883)

(6,334,854)

Other comprehensive gain/(loss):

Gain/(loss) on foreign currency translation

1,636

(91,842)

49,477

(145,217)

Comprehensive loss

$

(2,743,402)

$

(317,385)

$

(4,790,406)

$

(6,480,071)

Net loss per Common Share, basic and diluted

$

(0.38)

$

(0.06)

$

(0.67)

$

(1.30)

Weighted-average Common Shares, basic and diluted

7,195,529

5,099,172

7,195,529

5,000,935

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

Table of Contents

PROMIS NEUROSCIENCES INC.

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit)

(expressed in US dollars, except share amounts)

(Unaudited)

Accumulated 

Additional

Other

Common Shares

Paid-in

Comprehensive

Accumulated

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Total

Balance, January 1, 2021

 

4,828,846

$

$

51,655,168

$

(50,731)

$

(52,401,095)

$

(796,658)

Conversion of special warrants

 

270,326

 

 

 

 

 

Share-based compensation

 

 

 

207,851

 

 

 

207,851

Foreign currency translation

 

 

 

 

(145,217)

 

 

(145,217)

Net loss

 

 

 

 

 

(6,334,854)

 

(6,334,854)

Balance, June 30, 2021

 

5,099,172

$

$

51,863,019

$

(195,948)

$

(58,735,949)

$

(7,068,878)

Accumulated

Series 1 Convertible

Additional

Other

Preferred Shares

Common Shares

Paid-in

Comprehensive

Accumulated

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Total

Balance, January 1, 2022

$

 

7,195,529

$

$

68,039,178

$

(187,919)

$

(62,191,201)

$

5,660,058

Share-based compensation

 

 

 

 

240,277

 

 

 

240,277

Conversion of convertible debt and derivative liability to Series 1 Preferred Shares

70,000,000

5,600,000

5,600,000

Foreign currency translation

 

 

 

 

 

49,477

 

 

49,477

Net loss

 

 

 

 

 

 

(4,839,883)

 

(4,839,883)

Balance, June 30, 2022

70,000,000

$

 

7,195,529

$

$

73,879,455

$

(138,442)

$

(67,031,084)

$

6,709,929

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

Table of Contents

PROMIS NEUROSCIENCES INC.

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit)

(expressed in US dollars, except share amounts)

(Unaudited)

Common Shares

Accumulated

Additional

Other

 

Paid-in

Comprehensive

Accumulated

 

Shares

Amount

Capital

Income (Loss)

Deficit

Total

Balance, April 1, 2021

    

5,099,172

    

$

    

$

51,733,845

    

$

(104,106)

    

$

(58,510,406)

    

$

(6,880,667)

Conversion of special warrants

 

 

 

 

 

 

Share-based compensation

 

 

 

129,174

 

 

 

129,174

Foreign currency translation

 

 

 

 

(91,842)

 

 

(91,842)

Net loss

 

 

 

 

 

(225,543)

 

(225,543)

Balance, June 30, 2021

 

5,099,172

$

 

$

51,863,019

 

$

(195,948)

 

$

(58,735,949)

 

(7,068,878)

Accumulated

Series 1 Convertible

Additional

Other

Common Shares

Preferred Shares

Paid-in

Comprehensive

Accumulated

Shares

Amount

Shares

Amount

Capital

Income (Loss)

Deficit

Total

Balance, April 1, 2022

    

7,195,529

    

$

    

    

$

    

$

68,164,043

    

$

(140,078)

    

(64,286,046)

    

$

3,737,919

Share-based compensation

 

 

 

 

 

115,412

 

 

 

115,412

Conversion of convertible debt and derivative liability to Series 1 Convertible Preferred Shares

 

 

 

70,000,000

 

 

5,600,000

 

 

 

5,600,000

Foreign currency translation

 

 

 

 

 

 

1,636

 

 

1,636

Net loss

 

 

 

 

 

 

 

(2,745,038)

 

(2,745,038)

Balance, June 30, 2022

 

7,195,529

$

 

70,000,000

$

$

73,879,455

$

(138,442)

$

(67,031,084)

$

6,709,929

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PROMIS NEUROSCIENCES INC.

Condensed Consolidated Statements of Cash Flows

(expressed in US dollars)

(Unaudited)

Six Months Ended

June 30, 

    

2022

    

2021

Cash flows from operating activities

 

  

 

  

Net loss

$

(4,839,883)

$

(6,334,854)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

Share-based compensation

 

240,277

 

207,851

Foreign currency exchange loss

 

251,033

 

(96,672)

Change in fair value of derivative liability

 

(2,643,123)

$

4,523,685

Change in fair value of warrant liability

 

(267,742)

 

Depreciation of property and equipment

 

3,887

 

21,477

Amortization of debt discount and issuance costs

 

250,060

 

97,404

Amortization of intangible assets

 

2,622

 

2,637

Gain on extinguishment of convertible debt and derivative liability

(1,307,421)

Changes in operating assets and liabilities:

 

 

Prepaid expenses and other current assets

 

(506,194)

 

(463,128)

Accounts payable

 

491,640

 

(212,309)

Accrued liabilities

 

480,287

 

163,704

Deferred compensation

 

 

(138,232)

Net cash used in operating activities

 

(7,844,557)

 

(2,228,437)

Cash flows from investing activities

 

 

Purchase of property and equipment

 

(2,048)

 

Other investing activities

 

 

2,372

Net cash (used in) provided by investing activities

 

(2,048)

 

2,372

Cash flows from financing activities

 

 

Proceeds from convertible debt

 

 

6,882,531

Net cash provided by financing activities

 

 

6,882,531

Effect of exchange rates on cash

 

(193,524)

 

110,758

Net (decrease)/increase in cash

 

(8,040,129)

 

4,767,224

Cash at beginning of period

 

16,943,905

 

806,887

Cash at end of period

$

8,903,776

$

5,574,111

Supplemental disclosure of cash flow information

 

 

Conversion of convertible debt and derivative liability to Series 1 Convertible Preferred Shares

$

5,600,000

Cash paid for interest on convertible debt

$

87,069

$

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PROMIS NEUROSCIENCES INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(expressed in US dollars, except share and per share amounts)

(Unaudited)

1.

DESCRIPTION OF BUSINESS

Business Description

ProMIS Neurosciences Inc. (the “Company” or “ProMIS”) is applying its patented technology platform to build a portfolio of antibody therapies, therapeutic vaccines, and other antibody-based therapies in neurodegenerative diseases and other misfolded protein diseases, including Alzheimer’s disease (“AD”), multiple system atrophy (“MSA”), and amyotrophic lateral sclerosis (“ALS”). The Company also plans to investigate additional synucleinopathies, including Parkinson’s disease (“PD”) and dementia with Lewy bodies (“DLB”), frontotemporal lobar degeneration (“FTLD”), progressive supranuclear palsy (“PSP”), corticobasal degeneration (“CBD”) and schizophrenia. These diseases share a common biologic cause – misfolded versions of proteins that otherwise perform a normal function, become toxic and kill neurons, resulting in disease. ProMIS’ technology platform is an example of the advances in drug discovery enabled by computational power, in silico discovery, and/or artificial intelligence. ProMIS believes this platform provides a potential advantage by selectively targeting the toxic misfolded proteins with therapeutics or detecting them with diagnostics.

The Company was incorporated on January 23, 2004 under the Canada Business Corporations Act and is located at 1920 Yonge Street, Toronto, Ontario. The Company’s Common Shares are traded on the Toronto Stock Exchange (“TSX”) and on the Nasdaq Capital Market (“Nasdaq”) under the symbol PMN. The Company has a wholly-owned U.S. subsidiary, ProMIS Neurosciences (US) Inc. (“ProMIS USA”), which was incorporated in January 2016 in the State of Delaware. As of June 30, 2022, ProMIS USA has had no material activity and has no material financial impact on the Company’s unaudited condensed consolidated financial statements.

The success of the Company is dependent on obtaining the necessary regulatory approvals of its product candidates, marketing its products, if approved, and achieving profitable operations. The continuation of the research and development activities and the commercialization of its products, if approved, are dependent on the Company’s ability to successfully complete these activities and to obtain additional financing through a combination of financing activities and operations. It is not possible to predict either the outcome of future research and development or commercialization programs, or the Company’s ability to fund these programs.

COVID-19

Impacts resulting from the COVID-19 pandemic have resulted in a widespread health crisis that has already adversely affected the economies and financial markets of many countries around the world. The international response to the spread of COVID-19 has led to significant restrictions on travel; temporary business closures; quarantines; global stock market and financial market volatility; a general reduction in consumer activity; operating, supply chain and project development delays and disruptions; and declining trade and market sentiment; all of which have and could further affect the world economy.

The extent to which the novel coronavirus may impact the Company’s business, preclinical research and development activities will depend on future developments which are highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, travel restrictions and social distancing in Canada, the United States and other countries, business closures or business disruptions and the effectiveness of actions taken by governments around the globe to contain and treat the disease. International scientific conferences at which the Company has been invited to present have been postponed, cancelled or will be held online instead, which diminishes exposure and the opportunity to meet with collaborators and potential partners. These scientific conferences have started to be held in person with an option to attend online. Vendors performing work for the Company have remained open, although they have indicated that their timelines are now somewhat longer. The current global uncertainty and its effect on the local and global economies may also have an adverse effect on the Company’s ability to secure additional financing to continue its research and development programs.

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Liquidity Risk

The accompanying unaudited condensed consolidated financial statements were prepared on a going concern basis, which assumes that the Company will continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. To date, the Company has not generated revenues from its activities. The Company had a net loss of $2.7 million and $4.8 million for the three and six months ended June 30, 2022, respectively, for the three months ended June 30, 2022 and an accumulated deficit of $67.0 million as of June 30, 2022. Available funds are expected to be sufficient to fund the Company’s operating expenses for at least 12 months from the date these unaudited condensed consolidated financial statements are issued. However, additional funding will be necessary to fund future research, pre-clinical and clinical activities. The Company will seek additional funding through public financings, debt financings, collaboration agreements, strategic alliances and licensing agreements. Although the Company has been successful in raising capital in the past, there is no assurance of success in obtaining such additional financing on terms acceptable to us, if at all, and there is no assurance that the Company will be able to enter into collaborations or other arrangements. If the Company is unable to obtain funding, it could force delays, reduce or eliminate research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect future business prospects, and the ability to continue operations.

The Company may continue to incur net losses for at least the next several years as the Company advances its product candidates. The Company is actively pursuing additional financing to further develop certain of the Company’s scientific initiatives, but there is no assurance these initiatives will be successful, timely or sufficient.

2.

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2021, which are included with the Company’s Form 10 Registration Statement and related amendments filed with the United States Securities Exchange Commission (“SEC). Furthermore, the Company’s significant accounting policies are disclosed in the audited consolidated financial statements for the years ended December 31, 2021 and 2020, included in the Company’s Form 10 Registration Statement filed with the SEC. Since the date of those audited consolidated financial statements, there have been no changes to the Company’s significant accounting policies.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and as amended by Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements for the periods presented reflect all adjustments, consisting of only normal recurring adjustments, necessary to fairly present the Company's financial position, results of operations, and cash flows. The December 31, 2021 condensed consolidated balance sheet was derived from audited financial statements, but does not include all GAAP disclosures. The unaudited condensed consolidated financial statements for the interim periods are not necessarily indicative of results for the full year.

On June 21, 2022, the directors of the Company authorized a reverse share split of the issued and outstanding Common Shares in a ratio of 60:1, effective June 28, 2022 (the “Reverse Share Split”). All information included in these unaudited interim condensed consolidated financial statements has been adjusted, on a retrospective basis, to reflect the Reverse Share Split, unless otherwise stated.

Principles of Consolidation

The accompanying unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany balances and transactions have been eliminated in consolidation.

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Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates, judgements and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made in the accompanying unaudited condensed consolidated financial statements include, but are not limited to, the accrual for research and development expenses, the valuation of share-based compensation, and the valuation of warrant liabilities and embedded derivative liabilities. Actual results could differ from those estimates, and such differences could be material to the unaudited condensed consolidated financial statements.

Segment Information

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker (“CODM”), or decision-making group, in making decisions on how to allocate resources and assess performance. The Company has one operating segment and its Chief Executive Officer and Chairman of the Board of Directors serves as the CODM. Substantially all of the Company’s assets are located in Canada.

Foreign Currency

Comprehensive loss is defined as a change in equity of a business enterprise during a period, resulting from transactions from non-owner sources. The reporting currency of the Company is the United States dollar (“US$”) and the functional currency of the Company is the Canadian dollar (“C$”). The assets and liabilities of the Company are translated to US$ at exchange rates in effect at the balance sheet date. All income statement accounts are translated at average exchange rates. Resulting foreign currency translation adjustments are recorded directly in accumulated other comprehensive income (loss) as a separate component of shareholders’ equity (deficit). Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss when realized and are not material for the three or six months ended June 30, 2022 and 2021.

Emerging Growth Company Status

The Company is an Emerging Growth Company, as defined in Section 2(a) of the Securities Act of 1933, as modified by the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these unaudited condensed consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (“Topic 842”), which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. In July 2018, the FASB issued ASU 2018-11, Leases (“Topic 842”) Targeted Improvements, to amend certain aspects of Topic 842. These amendments provide entities with an additional (and optional) transition method to adopt Topic 842. Under this transition method, an entity initially applies the transition requirements in Topic 842 at that Topic’s effective date with the effects of initially applying Topic 842 recognized as a cumulative effect adjustment to the opening balance of retained earnings (or other components of equity or net assets, as appropriate) in the period of adoption. On April 8, 2020, the FASB changed the effective date of this standard applicable to the Company as an emerging growth company to January 1, 2022. The Company adopted this standard as of January 1, 2022 with no material impact on the unaudited condensed consolidated financial statements.

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In December 2019, the FASB issued ASU No 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“Topic 740”), as part of its simplification initiative to reduce the cost and complexity in accounting for income taxes. The amendments in ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. For emerging growth companies, the standard is effective for fiscal years beginning after December 15, 2021. The Company adopted this standard as of January 1, 2022 with no material impact on the unaudited condensed consolidated financial statements.

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20 ”) and Derivatives and Hedging Contracts in Entity s Own Equity (Subtopic 815-40 ”): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred shares. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (i) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (ii) convertible debt instruments issued with substantial premiums for which the premiums are recorded as additional paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 will be effective for the Company for fiscal years beginning after December 15, 2023. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the potential impact adopting ASU 2020-06 will have on the Company’s consolidated financial statements and related disclosures.

3.

FAIR VALUE MEASUREMENTS

The following are the major categories of assets measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021:

As of June 30, 2022

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

  

 

  

 

  

 

  

Short-term investments

$

32,687

$

$

$

32,687

Total assets measured at fair value

$

32,687

$

$

$

32,687

Liabilities:

 

 

  

 

 

Derivative liability

$

$

$

$

Warrant liability

 

 

 

1,605,020

 

1,605,020

Total liabilities measured at fair value

$

$

$

1,605,020

$

1,605,020

As of December 31, 2021

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

  

 

  

 

  

 

  

Short-term investments

$

33,248

$

$

$

33,248

Total assets measured at fair value

$

33,248

$

$

$

33,248

Liabilities:

 

  

 

  

 

  

 

  

Derivative liability

$

$

$

5,379,878

$

5,379,878

Warrant liability

 

 

 

1,871,687

 

1,871,687

Total liabilities measured at fair value

$

$

$

7,251,565

$

7,251,565

No transfers between levels have occurred in either reporting period presented.  Refer to Note 8 below for further discussion on the extinguishment of the derivative liability and Note 9 below for disclosures related to the warrant liability.

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4.

PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following:

June 30, 

    

December 31, 

    

2022

    

2021

Upfront research payments

$

845,387

$

554,878

Goods and services tax receivable

 

56,421

 

48,690

Insurance

 

14,725

 

32,853

Dues and subscriptions

 

25,791

 

Consultants

 

56,910

 

69,915

License fee

 

33,944

 

19,754

Deposits

 

13,605

 

6,839

Deferred financing costs

 

176,904

 

Miscellaneous

 

1,514

 

4,387

Total prepaid expenses and other current assets

$

1,225,201

$

737,316

5.

PROPERTY AND EQUIPMENT

Property and equipment, net, consist of the following:

June 30, 

    

December 31, 

    

2022

    

2021

Laboratory equipment

$

65,285

$

66,403

Computer equipment

 

19,383

 

17,657

Total property and equipment

 

84,668

 

84,060

Less: accumulated depreciation

 

(81,892)

 

(79,389)

Property and equipment, net

$

2,776

$

4,671

Depreciation expense was $2,108 and $10,750 for the three months ended June 30, 2022 and 2021, respectively and $3,887 and $21,477 for the six months ended June 30, 2022 and 2021, respectively.

6.

INTANGIBLE ASSETS

The Company has intangible assets consisting of acquired rights and patents with finite lives.

In March 2012, the Company acquired rights to a certain patented technology that it had licensed from its Chief Scientific Officer for C$100,000. The Company is amortizing this asset over its expected useful life of 15 years.

June 30, 

    

December 31, 

    

2022

    

2021

Intangible assets

$

77,683

$

79,015

Less: accumulated amortization

 

(53,126)

 

(51,401)

Intangible assets, net

$

24,557

$

27,614

Amortization expense was $1,306 and $1,320 for the three months ended June 30, 2022 and 2021, respectively and $2,622 and $2,637 for the six months ended June 30, 2022 and 2021, respectively.

As of June 30, 2022, the estimated expected amortization expense related to the Company’s intangible assets is $2,591 for the remaining 6 months of 2022, $5,183 for each year through the year ended 2026, and the remaining $1,234 to be expensed during the year ended 2027.

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7.

ACCRUED LIABILITIES

Accrued liabilities consist of the following:

June 30, 

December 31, 

    

2022

    

2021

Legal

$

100,164

$

171,777

Accounting

 

73,662

 

123,026

Research and development

 

569,335

 

106,845

Accrued interest

 

 

54,398

Other

 

242,872

 

64,047

Accrued liabilities

$

986,033

$

520,093

8.

CONVERTIBLE DEBT

In March 2021, the Company completed a $7.0 million private placement of the convertible unsecured debentures ("Debentures"). The Company allocated $3,567,442 of proceeds to the Debentures. The Company incurred $48,220 of issuance costs in connection with the private placement of which $24,575 was allocated to the Debentures and amortized over the life of the Debentures. The conversion feature has been recognized as a derivative liability recorded as a discount to the Debentures, adjusted to fair value each reporting period with the change in fair value recorded in the unaudited condensed consolidated statements of operations and comprehensive loss. The derivative liability was valued at $3,432,558 at issuance.

On June 17, 2022, the Company amended the conversion feature of the Debentures (the “Amended and Restated Debentures”). Previously, the Debentures were convertible into Common Shares at the option of the holder at any time and from time to time at a conversion price of $6.00. Following the amendment, the Amended and Restated Debentures became convertible into Series 1 Convertible Preferred Shares at the option of the holder at any time and from time to time at a conversion price of $6.00. No other terms of the Debentures were amended. The modification of the Debentures was determined to be non-substantial.

Between June 17, 2022 and June 19, 2022, the Company received notices of conversion from the holders of the Company’s Amended and Restated Debentures, requesting conversions in the aggregate of $7.0 million, representing the entirety of the outstanding balance thereof. In satisfaction of the notices of conversion, the Company issued, in the aggregate, 70,000,000 Series 1 Convertible Preferred Shares, described further in Note 9, to the Amended and Restated Debenture holders in accordance with the terms of the Amended and Restated Debentures and made cash payments to settle accrued interest through the conversion dates in the amount of $17,069.

The Company recognized the redemption as an extinguishment of the outstanding debt and the related derivative, which required a remeasurement of the derivative liability as of June 19, 2022. The derivative liability at June 19, 2022 was valued at $2,741,058 using a scenario-based valuation method using a Monte Carlo simulation model, volatility of 87%, a risk-free interest rate of 2.94% and a selected debt yield of 27.2%. On June 19, 2022, following the remeasurement of the derivative liability, the Company recognized a gain from the change in fair value of the derivative liability of $892,753 during the three months ended June 30, 2022. The total gain recognized on the change in fair value of the derivative liability was $2,643,123 during the six months ended June 30, 2022. The extinguishment of the convertible notes was accounted for as follows:

    

June 19, 2022

Carrying value of convertible debt net of issuance costs and debt discount (includes amortization of debt discount of $117,212 from April 1, 2022 to June 19, 2022)

$

4,166,363

Derivative liability remeasured as of June 19, 2022

 

2,741,058

Total liabilities extinguished on conversion

 

6,907,421

Fair value of Series 1 Convertible Preferred Shares recorded to additional paid-in-capital

 

5,600,000

Gain on extinguishment of convertible debt and derivative liability

$

1,307,421

The fair value of Series 1 Convertible Preferred Shares recorded to additional paid-in-capital was calculated using the observable market price of Common Shares as the basis for determining fair value. The fair value of Common Shares was $0.08 per share on the conversion date. Legal fees resulting from the debt modification were expensed as incurred.

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9.

EQUITY

The Company has authorized an unlimited number of both Common and Preferred Shares. As of June 30, 2022 and December 31, 2021, the Company had 7,195,529 issued and outstanding Common Shares and 70,000,000 and 0 issued and outstanding Series 1 Convertible Preferred Shares as of June 30, 2022 and December 31, 2021, respectively. The Common Shares have no par value.

Common Shares reserved for future issuance consists of the following:

June 30, 

December 31, 

    

2022

    

2021

Warrants

 

1,560,588

 

1,560,588

Series 1 Convertible Preferred Shares

 

1,166,667

 

Convertible debt

1,166,667

Options issued and outstanding under stock option plan

 

834,691

 

738,037

Deferred share units

 

1,061

 

1,061

Common Shares available for grant under stock option plan

 

185,144

 

281,798

Total Common Shares reserved for future issuance

 

3,748,151

 

3,748,151

The rights of the Common Shares are as follows:

Voting

Subject to any special voting rights or restrictions, holders of Common Shares entitled to vote shall have one vote per share.

Dividends

The Company’s Board of Directors may from time to time declare and authorize payment of dividends, if any, as they may deem advisable and need not give notice of such declaration to any shareholder. Subject to the rights of common shareholders, if any, holding shares with specific rights as to dividends, all dividends on Common Shares shall be declared and paid according to the number of such shares held and paid in Canadian dollars.

Liquidation Rights

In the event of the liquidation, dissolution or winding-up of the Company or any other distribution of the Company’s assets for the purpose of winding up the Company’s affairs, after the payment of dividends declared but unpaid, the holders of Common Shares shall be entitled pari passu to receive any remaining property of the Company.

Series 1 Convertible Preferred Shares

On June 17, 2022, the directors of the Company authorized the issuance of 70,000,000 Series 1 Convertible Preferred Shares (“Preferred Shares”) with the following preferences, privileges and rights:

Dividends

If the Company declares, pays or sets aside any dividends on shares of any other class or series of capital stock the holders of the Preferred Shares shall receive a dividend on each outstanding share of Preferred Share in an amount equal to that dividend per share of the Preferred Share as would equal the product of the dividend payable as if all shares of such series had been converted into Common Shares.

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Liquidation

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Preferred Shares shall be entitled to be paid out of the assets of the Company available for distribution to the shareholders an amount per share equal to $6.00, plus any dividends declared but not paid. If, upon any such liquidation event, the assets available for distribution to the shareholders are insufficient to pay the holders of the Preferred Shares, the holders of the Preferred Shares shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

Voting

The Preferred Shares do not confer any voting rights or privileges.

Redemption

The Preferred Shares are not subject to mandatory redemption or other redemption provisions for which the events resulting in redemption are not within the Company’s control.

Optional Conversion

Preferred Shares are convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and non-assessable Common Shares as is determined by dividing $0.10 by the applicable conversion price in effect at the time of conversion. The Conversion Price was initially equal to $0.10 and, following the Reverse Share Split on June 28, 2022, is equal to $6.00, such that 60 Preferred Shares are convertible into 1 Common Share.

Mandatory Conversion

All outstanding Preferred Shares shall automatically convert into Common Shares, at the effective conversion rate upon the closing of one or more sales of equity securities resulting in at least $30 million of gross proceeds to the Company.

Equity Transactions

In August 2021, the Company announced the closing of a public offering of 2,096,354 Common Share units at a price of US$9.60 per unit for gross proceeds of $20,125,000. The Company incurred $3,067,604 of share issuance costs in conjunction with the public offering. Each Common Share unit (“Unit”) consisted of one Common Share and one-quarter Common Share purchase warrant. Each whole warrant entitles the holder thereof to purchase one quarter Common Share at an exercise price of $12.60 per share at any time for five years. The warrants contain an acceleration clause allowing the Company to accelerate the expiry date of the warrants to 30 days following a time period during which the Common Share VWAP exceeds a TSX trading price of C$37.80 for ten consecutive trading days.

The Company determined the allocation of the US$9.60 Unit issue price to the Common Shares and the one-quarter Common Share purchase warrants based on the relative fair values of the warrants, with the residual charged to equity. The Common Shares were allocated gross proceeds of $15,868,381 and share issue costs of $1,665,099. The Common Share warrants are accounted for as a warrant liability since the exercise price is in US$ while the Company’s functional currency is C$. The initial balance was calculated using the assumptions below resulting an allocation of gross proceeds of $2,739,221. Due to the existence of the acceleration option, the Company determined it was appropriate to fair value the warrants using a Monte Carlo Simulation model (“Monte Carlo”). The Common Shares issued were allocated a price of US$8.28 per share and the quarter Common Share purchase warrants were allocated a price of US$1.32. Assumptions used to determine the value of the Common Share warrants were: an average risk-free interest rate of 0.84%; annual volatility of 95.6%; and expected life of 5.0 years. The issuance costs allocated to the warrants based on the relative fair values of the warrants amounted to $444,558 and were charged to general and administrative expense in the condensed consolidated statements of operations and comprehensive loss.

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As of June 30, 2022, the fair value of the warrants was calculated using the Monte Carlo model with the following parameters: risk free interest rate of 2.39%; annual volatility of 94.00%; and expected life of 4.4 years. The balance as of June 30, 2022 was $1,605,020.

June 30, 

    

2022

Balance at December 31, 2021

$

1,871,687

Change in fair value of the warrant liability

 

(267,742)

Foreign exchange loss

 

1,075

Balance at June 30, 2022

$

1,605,020

December 31, 

    

2021

Balance at December 31, 2020

$

Warrant liability at issuance

 

2,739,221

Change in fair value of the warrant liability

 

(840,555)

Foreign exchange gain

 

(26,979)

Balance at December 31, 2021

$

1,871,687

10.

WARRANTS

As of June 30, 2022, outstanding Common Share warrants and exercise prices denominated in C$ unless otherwise noted, related to unit offerings are as follows:

Exercise

Number of

    

Price $

    

Warrants

    

Expiry date

18.00

 

81,009

 

August 2022

17.10

 

21,083

 

August 2022

28.80

 

100,073

 

April 2023

28.80

 

139,659

 

January 2024

18.00

 

68,334

 

June 2024

18.00

 

150,818

 

November 2024

18.00

 

49,167

 

December 2024

12.00

 

279,613

 

November 2025

USD12.60

 

524,088

 

August 2026

USD9.60

 

146,744

 

August 2026

 

1,560,588

 

11.

SHARE-BASED COMPENSATION

2007 Stock Option Plan

The Company maintains the 2007 Stock Option Plan (“2007 Option Plan”). In June 2015, the 2007 Option Plan was amended from a fixed option plan to a rolling share option plan pursuant to which the Company is authorized to grant options of up to 20% of its issued and outstanding Common Shares. Share options granted vest at various rates and have a term not exceeding ten years. As of June 30, 2022 and December 31, 2021, the Company had 185,144 and 281,798 options, respectively, available for grant under the 2007 Option Plan.

16

Table of Contents

The following table summarizes the activity of the share options under the 2007 Option Plan for the six months ended June 30, 2022. All amounts are denominated in C$, except year and share amounts:

Weighted

    

Weighted

    

Average

Average

Number of

Exercise

Remaining

Aggregate

Share

Price Per

Contractual

Intrinsic

    

Options

    

Share

    

Term (years)

    

Value

Outstanding as of December 31, 2021

 

738,037

$

8.40

 

5.1

$

2,231,293

Granted

 

151,666

 

7.20

 

 

Forfeited

 

(55,013)

 

18.59

 

 

Outstanding as of June 30, 2022

 

834,691

 

7.64

 

5.7

 

471,532

Vested and exercisable as of June 30, 2022

 

629,886

$

7.25

 

4.5

$

597,539

The aggregate intrinsic value of options outstanding and vested and exercisable is calculated as the difference between the exercise price of the underlying options, and the fair value of the Company’s Common Shares.

During the six months ended June 30, 2022 and 2021, the Company granted share options with a grant date fair value C$964,305 and C$328,148 respectively. During the six months ended June 30, 2022 there were no options exercised.

The fair value of the share options granted was estimated using Black Scholes with the following assumptions:

    

Six Months Ended

 

June 30, 

2022

2021

 

Weighted average fair value of Common Shares

 

C$

6.35

 

C$

14.40

Expected volatility

 

98.8

%  

90.0

%

Risk-free interest rate

 

2.59

%  

0.71

%

Expected dividend yield

 

0

%  

0

%

Expected term (years)

 

6.0

 

2.8

Expected volatility is based on historical volatility of our shares over the expected life of the option, as our options are not readily tradable.

DSU Plan

The Company has a deferred share unit plan (“DSU Plan”) for senior officers. Under the DSU Plan, rights to the Company’s Common Shares may be awarded on a deferred payment basis up to a maximum of 16,666 Common Share units. Each Common Share unit will fully vest upon cessation of employment with the Company and then can be redeemed for one Common Share of the Company by the unitholder. The Company has 1,061 units outstanding as of June 30, 2022.

Share-based Payment Expense

The following table summarizes total share-based compensation included in the Company’s accompanying unaudited condensed consolidated statements of operations and comprehensive loss:

Three Months Ended

 

Six Months Ended

June 30, 

June 30, 

    

2022

    

2021

    

2022

    

2021

Research and development

$

38,473

$

73,865

$

100,579

$

105,178

General and administrative

 

78,470

 

52,399

 

139,698