Edesa Biotech(EDSA) - 2022 Q1 - Quarterly Report

PART I FINANCIAL STATEMENTS Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed interim consolidated financial statements, including the balance sheets, statements of operations, cash flows, and changes in shareholders' equity, along with comprehensive notes detailing the company's operations, accounting policies, and specific financial items Condensed Interim Consolidated Balance Sheets The balance sheet shows a decrease in total assets from $14.58 million in September 2021 to $12.34 million in December 2021, primarily driven by a reduction in cash and cash equivalents. Total liabilities increased slightly, while total shareholders' equity decreased | Metric | December 31, 2021 | September 30, 2021 | | :-------------------------------- | :------------------ | :------------------- | | Total Assets | $12,343,356 | $14,584,655 | | Cash and cash equivalents | $5,880,749 | $7,839,259 | | Total Liabilities | $1,794,111 | $1,526,364 | | Total Shareholders' Equity | $10,549,245 | $13,058,291 | Condensed Interim Consolidated Statements of Operations The company reported a significant increase in net loss for the three months ended December 31, 2021, primarily due to a substantial rise in research and development expenses, partially offset by grant income | Metric | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | | :-------------------------------- | :------------------------------ | :------------------------------ | | Research and development | $3,951,046 | $1,379,654 | | Reimbursement grant income | $780,257 | $- | | Net Loss | $(4,378,677) | $(2,637,612) | | Loss per common share - basic and diluted | $(0.33) | $(0.26) | Condensed Interim Consolidated Statements of Cash Flows Net cash used in operating activities increased, while net cash provided by financing activities decreased significantly, leading to a larger net decrease in cash and cash equivalents compared to the prior year | Metric | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | | :-------------------------------- | :------------------------------ | :------------------------------ | | Net cash used in operating activities | $(3,207,614) | $(3,010,529) | | Net cash provided by financing activities | $1,228,504 | $1,994,972 | | Net change in cash and cash equivalents | $(1,958,510) | $(908,402) | | Cash and cash equivalents, end of period | $5,880,749 | $6,305,293 | Condensed Interim Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity decreased from $13.06 million to $10.55 million during the quarter, primarily due to the net loss, partially offset by proceeds from common share issuances and share-based compensation | Metric | September 30, 2021 | December 31, 2021 | | :-------------------------------- | :----------------- | :---------------- | | Balance - Total Shareholders' Equity | $13,058,291 | $10,549,245 | | Net loss and comprehensive loss | - | $(4,346,828) | | Issuance of common shares in equity offerings | - | $1,287,167 | | Share-based compensation | - | $609,278 | Notes to Condensed Interim Consolidated Financial Statements (Unaudited) These notes provide detailed explanations and disclosures for the financial statements, covering the nature of operations, accounting policies, intangible assets, lease commitments, capital shares, grant income, financial instruments, loss per share, related party transactions, and subsequent events 1. Nature of Operations - Edesa Biotech, Inc. is a biopharmaceutical company focused on acquiring, developing, and commercializing clinical-stage drugs for inflammatory and immune-related diseases[20] - The company's common shares trade on The Nasdaq Capital Market under the symbol "EDSA"[21] - The ongoing COVID-19 pandemic has caused material disruptions and its full impact on the company's future operations, clinical study timelines, and financial results remains uncertain[22][23] 2. Basis of Preparation - The unaudited condensed interim consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and Form 10-Q instructions[24] - The financial statements consolidate Edesa Biotech, Inc. and its wholly-owned subsidiaries, Edesa Biotech Research, Inc. (Ontario) and Edesa Biotech USA, Inc. (California)[25] - The functional currency is U.S. dollars for the Company and its U.S. subsidiary, and Canadian dollars for its Canadian subsidiary[27] 3. Intangible Assets - The company acquired an exclusive worldwide license for monoclonal antibodies ("the Constructs") in April 2020, recognized as an intangible asset[28] - The intangible asset is amortized over an estimated useful life of 25 years[30] | Metric | December 31, 2021 | September 30, 2021 | | :------------------------- | :------------------ | :------------------- | | Total intangible assets, net | $2,357,071 | $2,382,364 | | Amortization expense (3 months) | $0.03 million | $0.03 million | 4. Related Party Operating Lease - The company leases executive offices from a company controlled by its CEO[35] | Metric | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | | :---------------- | :------------------------------ | :------------------------------ | | Operating lease cost | $20,353 | $19,688 | | Remaining lease term (months) | 12 (as of Dec 31, 2021) | 15 (as of Sep 30, 2021) | 5. Commitments Aggregate Future Contractual Payments (as of December 31, 2021): | Year Ending September 30, | Amount | | :------------------------ | :------------- | | 2022 | $3,889,000 | | 2023 | $228,000 | | 2024 | $75,000 | | 2025 | $12,000 | | Total | $4,204,000 | - The company has contingent milestone commitments of up to $352.5 million for the monoclonal antibodies license and up to $68.9 million for a pharmaceutical product license, primarily relating to future commercial approval and sales milestones[38][41] - Royalty commitments are based on net sales of licensed products and a percentage of sublicensing revenue[38][40] 6. Capital Shares Equity Offerings - On March 2, 2021, the company closed an underwritten offering of 1,562,500 common shares at $6.40 per share, generating $10.0 million in gross proceeds[43] - Direct costs related to the issuance were $1.11 million, and the fair value of underwriter warrants was $0.41 million[44] Equity Distribution Agreements - During the three months ended December 31, 2021, 223,396 common shares were sold under an at-the-market equity distribution agreement with RBCCM, resulting in $1.29 million in gross proceeds[45] - The program size was reset on December 28, 2021, to allow for the sale of common shares with an aggregate offering price of up to $10.7 million[45] Black-Scholes option valuation model - The Black-Scholes option valuation model is used to determine the fair value of share-based compensation for share options and warrants[47] - Key subjective assumptions include expected price volatility (based on historical data or peer groups), U.S. treasury yield rates for interest-free rates, and an expected life of 5 years for options[47] Warrants | Metric | December 31, 2021 | | :-------------------------------- | :------------------ | | Number of Warrants Outstanding | 720,446 | | Weighted Average Exercise Price | $5.69 | | Weighted Average Contractual Life Remaining | 22 months | Share Options | Metric | December 31, 2021 | | :-------------------------------- | :------------------ | | Number of Options Outstanding | 1,776,005 | | Weighted Average Exercise Price | $5.00 | | Weighted Average Contractual Life Remaining | 100 months | | Metric | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | | :-------------------------------- | :------------------------------ | :------------------------------ | | Share-based compensation expenses | $0.61 million | $0.72 million | - As of December 31, 2021, approximately $1.57 million of unrecognized share-based compensation expense is expected to be recognized over 35 months[60] 7. Reimbursement Grant Income and Receivable - Reimbursement grant income from the Canadian government's Strategic Innovation Fund (SIF) is recorded based on eligible costs[61] - At December 31, 2021, grant reimbursements receivable amounted to $2,629,060[61] 8. Financial Instruments Fair values - The company uses a fair value hierarchy with three levels of inputs: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[66][67][68] - The carrying value of cash and cash equivalents, accounts and other receivable, and accounts payable and accrued liabilities approximates fair value due to their short-term nature[68] Interest rate and credit risk - Interest rate risk is not considered significant due to the short-term nature of cash and cash equivalents[69] - Credit risk is managed by maintaining bank accounts with credit-worthy Canadian and U.S. banks and investing in money market mutual funds of U.S. government securities[70] - Credit risk for reimbursement grants and HST refunds is not significant as amounts are due from the Canadian government[70] Foreign exchange risk - The company is exposed to foreign exchange risk from Canadian dollar-denominated assets (approximately C$7.3 million at December 31, 2021)[71] - A 10% annual change in the Canadian/U.S. exchange rate would impact the company's loss and other comprehensive loss by approximately $575,000[71] - The company has not entered into any agreements or purchased any instruments to hedge possible currency risks[71] Liquidity risk - Liquidity risk is managed by closely monitoring forecasted cash requirements against expected cash drawdowns[72] 9. Loss per Share - Securities that could potentially dilute basic EPS were excluded from the computation of diluted loss per share because their effect would have been anti-dilutive[74] 10. Related Party Transactions - The company incurred $0.2 million in rent expense each for the three months ended December 31, 2021 and 2020, from a company controlled by its CEO[75] 11. Subsequent Events - Subsequent to December 31, 2021, and through January 28, 2021, 256,455 common shares were sold under the equity distribution agreement, generating $1.19 million in gross proceeds[76] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This section provides management's perspective on the company's financial condition, results of operations, and future outlook, highlighting its biopharmaceutical focus, clinical programs, recent developments, and liquidity strategy Overview - Edesa Biotech is a biopharmaceutical company focused on acquiring, developing, and commercializing clinical-stage drugs for inflammatory and immune-related diseases[80] - Lead product candidates include EB05 for Acute Respiratory Distress Syndrome (ARDS) in COVID-19 patients (in Phase 2/3 study) and EB01 for chronic allergic contact dermatitis (in Phase 2b clinical study)[80][81][83] - The Phase 2 part of the EB05 study identified a "clinically important" mortality benefit, leading to a recommendation for continuation into a Phase 3 confirmatory trial[81] Recent Developments - Health Canada authorized the Phase 3 study design for EB05 in critically ill COVID-19 patients (Level 7 on WHO's COVID-19 Severity Scale), with approximately 315 evaluable subjects planned[86] - The company is in discussions with the U.S. FDA regarding the design of the final Phase 3 protocol[86] Results of Operations Comparison of the Three Months Ended December 31, 2021 and 2020 | Metric | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | Change | | :-------------------------------- | :------------------------------ | :------------------------------ | :----- | | Total operating expenses | $5.16 million | $2.61 million | +$2.55 million | | Research and development expenses | $3.95 million | $1.38 million | +$2.57 million | | General and administrative expenses | $1.21 million | $1.23 million | -$0.02 million | | Total other income (loss) | $0.78 million (gain) | $(0.02) million (loss) | +$0.80 million | | Net loss | $4.38 million | $2.64 million | +$1.74 million | | Loss per common share | $0.33 | $0.26 | +$0.07 | - The increase in R&D expenses was primarily due to increased external research expenses related to ongoing clinical studies, investigational drug product expenses, higher salary and personnel expenses, and higher patent fees[87] - The increase in total other income was primarily due to increased grant income under the federal reimbursement grant with the Canadian government's Strategic Innovation Fund[88] Capital Expenditures - There were no significant capital expenditures for the three months ended December 31, 2021 and 2020, primarily consisting of computer and office equipment[90] Liquidity and Capital Resources - As a clinical-stage company, Edesa has not generated significant revenue and expects to incur operating losses[91] | Metric | December 31, 2021 | | :-------------------- | :------------------ | | Cash and cash equivalents | $5.88 million | | Working capital | $8.14 million | | Accumulated deficit | $30.87 million | - The company plans to finance operations over the next twelve months with cash on hand, equity sales under the at-the-market offering program (approximately $9.51 million available), and reimbursements from the Canadian government's Strategic Innovation Fund (up to C$14.05 million / $11 million USD)[92][99] - Management is planning to seek additional financing through government grants, equity sales, debt financings, or other capital sources[99] Research and Development | Metric | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | | :------------------------- | :------------------------------ | :------------------------------ | | Research and development expenses | $3.95 million | $1.38 million | - The increase in R&D expenses was primarily due to increased activities and preparations related to the ongoing Phase 2/Phase 3 clinical study of the EB05 drug candidate[101] - R&D expenses include employee-related costs, manufacturing, clinical activities, and regulatory filings[100] Off Balance Sheet Arrangements - The company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its financial condition or results of operations[104] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Edesa Biotech is not required to provide disclosures under this item - The company is a smaller reporting company and is not required to provide disclosure under this item[106] Item 4. Controls and Procedures Management evaluated the effectiveness of disclosure controls and procedures, concluding they were effective as of December 31, 2021. There were no material changes in internal control over financial reporting during the quarter Disclosure Controls and Procedures - Management, including the Chief Executive Officer and Chief Financial Officer, concluded that the disclosure controls and procedures were effective as of December 31, 2021[109] Changes in Internal Control over Financial Reporting - There were no changes in internal control over financial reporting during the quarter ended December 31, 2021, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[110] PART II OTHER INFORMATION Item 1. Legal Proceedings The company is not currently a party to any material legal proceedings or claims outside the ordinary course of business - The company is not currently a party to any material legal proceedings or claims outside the ordinary course of business[112] Item 1A. Risk Factors There have been no material changes to the risk factors previously discussed in the Annual Report on Form 10-K for the year ended September 30, 2021 - There have been no material changes to the risk factors discussed in Item 1A. Risk Factors in the Annual Report on Form 10-K for the year ended September 30, 2021[113] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - None[115] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report for the period - None[117] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[119] Item 5. Other Information There is no other information to report for the period - None[121] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the Chief Executive Officer and Chief Financial Officer, and XBRL taxonomy documents - The exhibit index includes certifications from the Chief Executive Officer and Chief Financial Officer (31.1, 31.2, 32.1*, 32.2*) and XBRL Instance, Schema, Calculation, Definition, Label, and Presentation Linkbase Documents[124] - Certifications 32.1* and 32.2* are furnished and deemed not filed with the SEC for purposes of Section 18 of the Exchange Act[124]