edsa_10q

10-Q 1 edsa_10q.htm QUARTERLY REPORT edsa_10q

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 March 31, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

For the transition period from to

Commission File Number: 001-37619

EDESA BIOTECH, INC.

(Exact name of registrant as specified in its charter)

British Columbia, Canada		N/A
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

100 Spy Court
Markham, Ontario, Canada		L3R 5H6
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (289) 800-9600

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

Title of each class		Trading Symbol		Name of exchange on which registered
Common Shares, without par value		EDSA		The Nasdaq Stock Market LLC

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, a 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 Act). Yes ☐ No ☒

As of May 13, 2021, the registrant had 13,255,559 common shares issued and outstanding.

Edesa Biotech, Inc.

Quarterly Report on Form 10 Q

For the Quarter Ended March 31, 2021

Table of Contents

PART I — FINANCIAL INFORMATION	3

Item 1. Financial Statements (Unaudited).	3

Condensed Interim Consolidated Balance Sheets – March 31, 2021 and September 30, 2020.	3

Condensed Interim Consolidated Statements of Operations – Three and Six Months Ended March 31, 2021 and 2020.	4

Condensed Interim Consolidated Statements of Cash Flows – Six Months Ended March 31, 2021 and 2020.	5

Condensed Interim Consolidated Statements of Changes in Shareholders' Equity – Three and Six Months Ended March 31, 2021 and 2020.	6

Notes to Condensed Interim Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	19

Item 3. Quantitative and Qualitative Disclosures About Market Risk.	22

Item 4. Controls and Procedures.	22

PART II — OTHER INFORMATION	23

Item 1. Legal Proceedings.	23

Item 1A. Risk Factors.	23

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	23

Item 3. Defaults Upon Senior Securities.	23

Item 4. Mine Safety Disclosures.	23

Item 5. Other Information.	23

Item 6. Exhibits.	24

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

Edesa Biotech, Inc.

Condensed Interim Consolidated Balance Sheets

	March 31, 2021	September 30, 2020

Assets:

Current assets:
Cash and cash equivalents	$10,966,194	$7,213,695
Accounts and other receivable	7,810,139	87,446
Prepaid expenses and other current assets	2,642,026	802,877

Total current assets	21,418,359	8,104,018

Non-current assets:
Property and equipment, net	16,129	14,815
Intangible asset, net	2,432,950	2,483,536
Operating lease right-of-use assets	134,252	160,006

Total assets	$24,001,690	$10,762,375


Liabilities, shareholders' equity and temporary equity:

Current liabilities:
Accounts payable and accrued liabilities	$4,543,123	$1,460,127
Short-term operating lease liabilities	77,012	69,730

Total current liabilities	4,620,135	1,529,857

Non-current liabilities:

Long-term payables	47,646	29,928
Long-term operating lease liabilities	61,125	94,460

Total liabilities	4,728,906	1,654,245

Commitments (Note 6)

Temporary equity:
Convertible preferred shares	-	2,476,955

Shareholders' equity:
Capital shares
Authorized unlimited common and preferred shares without par value
Issued and outstanding:
13,246,559 common shares (September 30, 2020 - 9,615,119)	34,602,637	18,500,853
Additional paid-in capital	2,914,482	1,550,480
Accumulated other comprehensive loss	(194,257)	(287,204)
Accumulated deficit	(18,050,078)	(13,132,954)

Total shareholders' equity	19,272,784	6,631,175

Total liabilities, shareholders' equity and temporary equity	$24,001,690	$10,762,375

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

Edesa Biotech, Inc.

Condensed Interim Consolidated Statements of Operations

	Three Months Ended		Six Months Ended
	March 31, 2021	March 31, 2020	March 31, 2021	March 31, 2020

Revenues:
Product sales	$-	$110,516	$-	$218,316

Expenses:
Cost of sales	-	10,037	-	13,815
Research and development	7,975,304	502,814	9,354,958	1,030,812
General and administrative	1,535,127	1,113,917	2,769,275	1,795,623

	9,510,431	1,626,768	12,124,233	2,840,250

Loss from Operations	(9,510,431)	(1,516,252)	(12,124,233)	(2,621,934)

Other Income (Loss):
Reimbursement grant income	7,170,465	-	7,170,465	-
Interest income	747	18,771	1,669	32,963
Foreign exchange gain	80,032	7,845	55,300	5,802

	7,251,244	26,616	7,227,434	38,765

Loss before income taxes	(2,259,187)	(1,489,636)	(4,896,799)	(2,583,169)

Income tax expense	800	-	800	800

Net Loss	(2,259,987)	(1,489,636)	(4,897,599)	(2,583,969)

Exchange differences on translation	(10,480)	(39,908)	92,947	(21,794)

Net Comprehensive Loss	$(2,270,467)	$(1,529,544)	$(4,804,652)	$(2,605,763)

Weighted average number of common shares	11,641,201	8,740,065	10,894,441	8,118,891

Loss per common share - basic and diluted	$(0.19)	$(0.17)	$(0.45)	$(0.32)

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

Edesa Biotech, Inc.

Condensed Interim Consolidated Statements of Cash Flows

	Six Months Ended
	March 31, 2021	March 31, 2020

Cash Flows from Operating Activities:
Net loss	$(4,897,599)	$(2,583,969)
Adjustments for:
Depreciation and amortization	58,647	5,054
Share-based compensation	1,190,347	388,775
Change in working capital items:
Accounts and other receivable	(7,564,714)	127,146
Prepaid expenses and other current assets	(1,928,522)	27,030
Accounts payable and accrued liabilities	2,951,784	75,805

Net cash used in operating activities	(10,190,057)	(1,960,159)

Cash Flows from Investing Activities:
Proceeds on sales of property and equipment	-	43,184
Purchase of property and equipment	(4,098)	(825)
Purchase of short-term investments	-	(500,000)
Proceeds from maturities of short-term investments	-	500,000

Net cash provided by (used in) investing activities	(4,098)	42,359

Cash Flows from Financing Activities:
Proceeds from issuance of common shares and warrants	12,793,591	4,360,500
Proceeds from exercise of warrants	1,467,536	-
Proceeds from exercise of share options	26,079	-
Payments for issuance costs	(349,408)	(468,699)

Net cash provided by financing activities	13,937,798	3,891,801

Effect of exchange rate changes on cash and cash equivalents	8,856	(14,654)

Net change in cash and cash equivalents	3,752,499	1,959,347
Cash and cash equivalents, beginning of period	7,213,695	5,030,583

Cash and cash equivalents, end of period	$10,966,194	$6,989,930


Supplemental Disclosure of Non-Cash Financing Activities:
Preferred shares converted from temporary equity to common shares	$2,496,480	$-
Issuance costs withheld from gross proceeds from issuance of common shares	955,950	-
Fair value of compensation warrants to underwriter	407,023	-
Fair value of placement agent warrants	-	18,051

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

Edesa Biotech, Inc.

Condensed Interim Consolidated Statements of Changes in Shareholders' Equity

	Shares #	Common Shares	Common Shares Subscribed	Additional Paid-in Capital	Accumulated Other Comprehensive Loss	Accumulated Deficit	Total Shareholders' Equity
Three Months Ended March 31, 2021
Balance - December 31, 2020	10,523,087	$21,696,459	$-	$2,156,719	$(183,777)	$(15,784,177)	$7,885,224

Issuance of common shares in equity offerings	1,979,210	12,723,013	-	-	-	-	12,723,013
Issuance costs including fair value of underwriter warrants	-	(1,810,237)	-	407,023	-	-	(1,403,214)
Issuance of common shares upon exercise of warrants	98,437	570,228	-	(97,731)	-	-	472,497
Issuance of common shares upon exercise of share options	10,746	45,047	-	(18,968)	-	-	26,079
Preferred return on convertible preferred shares	-	-	-	-	-	(5,914)	(5,914)
Conversion of convertible preferred shares	635,079	1,378,127	-	-	-	-	1,378,127
Share-based compensation	-	-	-	467,439	-	-	467,439
Net loss and comprehensive loss	-	-	-	-	(10,480)	(2,259,987)	(2,270,467)

Balance - March 31, 2021	13,246,559	$34,602,637	$-	$2,914,482	$(194,257)	$(18,050,078)	$19,272,784


Three Months Ended March 31, 2020
Balance - December 31, 2019	7,504,468	$12,005,051	$45,000	$336,543	$(323,960)	$(7,828,948)	$4,233,686

Issuance of common shares and warrants in equity offering	1,354,691	3,070,358	(45,000)	1,290,142	-	-	4,315,500
Issuance costs	-	(342,735)	-	(125,964)	-	-	(468,699)
Share-based compensation	-	-	-	380,000	-	-	380,000
Net loss and comprehensive loss	-	-	-	-	(39,908)	(1,489,636)	(1,529,544)

Balance - March 31, 2020	8,859,159	$14,732,674	$-	$1,880,721	$(363,868)	$(9,318,584)	$6,930,943

Six Months Ended March 31, 2021
Balance - September 30, 2020	9,615,119	$18,500,853	$-	$1,550,480	$(287,204)	$(13,132,954)	$6,631,175

Issuance of common shares in equity offerings	2,148,963	13,749,541	-	-	-	-	13,749,541
Issuance costs including fair value of underwriter warrants	-	(1,871,220)	-	407,023	-	-	(1,464,197)
Issuance of common shares upon exercise of warrants	341,806	1,681,936	-	(214,400)	-	-	1,467,536
Issuance of common shares upon exercise of share options	10,746	45,047	-	(18,968)	-	-	26,079
Preferred return on convertible preferred shares	-	-	-	-	-	(19,525)	(19,525)
Conversion of convertible preferred shares	1,129,925	2,496,480	-	-	-	-	2,496,480
Share-based compensation	-	-	-	1,190,347	-	-	1,190,347
Net loss and comprehensive loss	-	-	-	-	92,947	(4,897,599)	(4,804,652)

Balance - March 31, 2021	13,246,559	$34,602,637	$-	$2,914,482	$(194,257)	$(18,050,078)	$19,272,784


Six Months Ended March 31, 2020
Balance - September 30, 2019	7,504,468	$12,005,051	$-	$327,768	$(342,074)	$(6,734,615)	$5,256,130

Issuance of common shares and warrants in equity offering	1,354,691	3,070,358	-	1,290,142	-	-	4,360,500
Issuance costs	-	(342,735)	-	(125,964)	-	-	(468,699)
Share-based compensation	-	-	-	388,775	-	-	388,775
Net loss and comprehensive loss	-	-	-	-	(21,794)	(2,583,969)	(2,605,763)

Balance - March 31, 2020	8,859,159	$14,732,674	$-	$1,880,721	$(363,868)	$(9,318,584)	$6,930,943

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

Edesa Biotech, Inc.

Notes to Condensed Interim Consolidated Financial Statements (Unaudited)

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 of Covid-19 on the Company’s business plans and financial condition.

Basis of Presentation

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 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, 2020, which were filed with the Securities and Exchange Commission (SEC) on December 7, 2020.

The accompanying 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 in 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 six months ended March 31, 2021 are not necessarily indicative of the results that may be expected for other interim periods or the fiscal year ending September 30, 2021.

Use of estimates

The preparation of the unaudited condensed interim 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 unaudited condensed interim consolidated financial statements and the reported amounts of revenue and expenses during the period. 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; operating lease right-of-use assets; deferred income taxes; classification of convertible preferred shares as liability or equity; 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 assign value to underwriter warrants; and forecasting future cash flows for assessing the going concern assumption.

Functional and reporting currencies

The condensed interim consolidated financial statements of the Company are presented in U.S. dollars, unless otherwise stated, which is the Company’s and its wholly owned subsidiary’s, Edesa Biotech USA, Inc., functional currency. The functional currency of the Company’s wholly owned subsidiary, Edesa Biotech Research, Inc., as determined by management, is Canadian dollars.

Future accounting pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which includes provisions that require the measurement of an estimate of all current expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Financial assets measured at amortized cost basis are to be presented at the net amount expected to be collected and credit losses relating to available-for-sale debt securities are to be recorded through an allowance for credit losses. The guidance is effective for public entities for fiscal years beginning after December 15, 2019, including interim periods within those years, with early adoption permitted for fiscal years beginning after December 15, 2018, however the effective date is delayed by one year for smaller reporting companies as defined by the SEC. These standards are effective for the Company during the fiscal year ending September 30, 2022. Management expects that ASU 2016-13, as updated, will not have a significant impact on the Company’s consolidated financial statements.

Edesa Biotech, Inc.

Notes to Condensed Interim Consolidated Financial Statements (Unaudited)

Property and Equipment

Property and equipment, net consisted of the following:

	March 31, 2021	September 30, 2020

Computer equipment	$39,550	$34,651
Furniture and equipment	6,043	5,694

	45,593	40,345
Less: accumulated depreciation	(29,464)	(25,530)

Total property and equipment, net	$16,129	$14,815

Depreciation expense amounted to $1,619 and $2,651 for the three months ended March 31, 2021 and 2020, respectively, and $3,934 and $5,054 for the six months ended March 31, 2021 and 2020, respectively.

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 quarterly.

The required upfront license payment of $2.5 million was paid by the issuance of Series A-1 Convertible Preferred Shares. The value of the license includes acquisition legal costs. The license agreement requires certain development, approval and commercialization milestone payments contingent on certain future events. The Company also has a commitment to pay royalties based on any net sales of licensed products and a percentage of any sublicensing revenue. See Note 6 for license commitments and Note 7 for convertible preferred shares in temporary equity.

Edesa Biotech, Inc.

Notes to Condensed Interim Consolidated Financial Statements (Unaudited)

Intangible assets, net consisted of the following

	March 31, 2021	September 30, 2020

The Constructs	$2,529,483	$2,529,483

Less: accumulated amortization	(96,533)	(45,947)

Total intangible assets, net	$2,432,950	$2,483,536

Amortization expense amounted to $25,293 and $50,586 for the three and six months ended March 31, 2021, respectively. There was no amortization expense for the three and six months ended March 31, 2020.

Total estimated future amortization of intangible assets for each fiscal year is as follows:

Year Ending
September 30, 2021	$50,586
September 30, 2022	101,172
September 30, 2023	101,172
September 30, 2024	101,172
September 30, 2025	101,172
Thereafter	1,977,676

	$2,432,950

Leases

Related party operating lease

The Company leases facilities used for executive offices from a related company for a six-year term through December 2022, with an option to renew for an additional two-year term. The option period is not included in the operating lease right-of-use assets and liabilities.

The gross amounts of assets and liabilities related to operating leases on the Balance Sheets were as follows:

	March 31, 2021	September 30, 2020
Assets:
Operating lease right-of-use assets	$134,252	$160,006

Liabilities:
Current:
Short-term operating lease liabilities	$77,012	$69,730
Long-term:
Long-term operating lease liabilities	61,125	94,460

Total lease liabilities	$138,137	$164,190

The components of lease cost were as follows:

	Three Months Ended		Six Months Ended
	March 31, 2021	March 31, 2020	March 31, 2021	March 31, 2020
Operating lease cost, includ