EDESA BIOTECH, INC.
10-Ks,20-Fs and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2019
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: 001-37619
EDESA BIOTECH, INC.
(Exact
name of registrant as specified in its charter)
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British Columbia, Canada
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N/A
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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100 Spy Court
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Markham, Ontario, Canada
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L3R 5H6
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code:
(289) 800-9600
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.
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Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
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☒
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Smaller
reporting company
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☒
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Emerging
growth company
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☒
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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 ☒
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Trading Symbol
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Name of exchange on which registered
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Common
Shares, without par value
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EDSA
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The
Nasdaq Capital Market
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As of
February 13, 2020 the registrant had 8,859,159 common shares issued
and outstanding.
All
historical references to common shares, warrants and share options
outstanding prior to June 7, 2019 and the related exercise prices
in this Form 10-Q have been adjusted to reflect the effect of the 1
for 6 reverse split, effected at the close of market on June 7,
2019.
Edesa Biotech, Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended December 31, 2019
Table of Contents
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PART I — FINANCIAL INFORMATION
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3
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3
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3
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4
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5
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6
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7
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15
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16
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16
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PART
II — OTHER INFORMATION
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17
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17
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17
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17
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17
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17
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17
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18
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2
PART I — FINANCIAL INFORMATION
I
tem 1. Financial Statements.
E
desa Biotech, Inc.
(Unaudited)
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December 31,
2019
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September 30,
2019
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Assets:
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Current assets:
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Cash
and cash equivalents
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$
3,827,050
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$
5,030,583
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Accounts
and other receivable
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109,600
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217,101
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Short-term
investments
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499,790
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-
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Deferred
share issuance costs
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116,611
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-
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Prepaid
expenses and deposits
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274,154
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397,022
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Total
current assets
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4,827,205
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5,644,706
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Property
and equipment, net
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48,309
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73,058
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Operating
lease right-of-use assets
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213,848
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-
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Total
assets
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$
5,089,362
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$
5,717,764
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Liabilities and shareholders' equity:
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Current liabilities:
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Accounts
payable and accrued liabilities
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$
637,531
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$
461,634
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Short-term
operating lease liabilities
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66,631
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-
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Total
current liabilities
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704,162
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461,634
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Non-current liabilities:
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Long-term
operating lease liabilities
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151,514
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-
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Total
liabilities
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855,676
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461,634
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Commitments
(Note 6)
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Shareholders' equity:
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Capital
shares
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Authorized
unlimited common and preferred shares without par
value
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Issued
and outstanding:
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7,504,468
Common shares
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12,005,051
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12,005,051
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Common
shares subscribed
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45,000
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-
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Additional
paid-in capital
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336,543
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327,768
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Accumulated
other comprehensive loss
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(323,960
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(342,074
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Accumulated
deficit
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(7,828,948
)
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(6,734,615
)
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Total
shareholders' equity
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4,233,686
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5,256,130
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Total
liabilities and shareholders' equity
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$
5,089,362
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$
5,717,764
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The
accompanying notes are an integral part of these condensed interim
consolidated financial statements.
3
E
desa Biotech, Inc.
Condensed
Interim Consolidated Statements of Operations
(Unaudited)
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Three-months
Ended
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December 31,
2019
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December 31,
2018
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Revenues:
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Product
sales and services
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$
107,800
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$
-
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Expenses:
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Cost
of sales and services
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3,778
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-
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Research
and development
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527,998
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257,391
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General
and administrative
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681,706
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148,350
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1,213,482
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405,741
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Loss from Operations
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(1,105,682
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(405,741
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Other Income (Loss):
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Interest
income
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14,192
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16,211
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Foreign
exchange gain (loss)
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(2,043
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24,681
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12,149
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40,892
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Loss before income taxes
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(1,093,533
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(364,849
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Income
tax expense
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800
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-
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Net Loss
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(1,094,333
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(364,849
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Exchange
differences on translation
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18,114
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17,760
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Net Loss and Comprehensive Loss
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$
(1,076,219
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$
(347,089
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Weighted
average number of common shares
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7,504,468
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3,239,902
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Loss
per common share - basic and diluted
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$
(0.15
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$
(0.11
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The
accompanying notes are an integral part of these condensed interim
consolidated financial statements.
4
E
desa Biotech, Inc.
Condensed
Interim Consolidated Statements of Cash Flows
(Unaudited)
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Three-months
Ended
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December
31,
2019
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December
31,
2018
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Cash Flows From Operating Activities:
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Net
loss
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$
(1,094,333
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$
(364,849
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Adjustments
for:
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Depreciation
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2,403
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412
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Straight-line
operating lease expense
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19,439
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-
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Share-based
compensation
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8,775
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11,434
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Change
in working capital items:
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Accounts
and other receivable
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108,882
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3,109
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Deferred
share issuance costs
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(116,611
)
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-
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Prepaid
expenses and deposits
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125,874
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6,031
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Accounts
payable and accrued liabilities
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175,299
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(38,483
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Operating
lease liabilities
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(19,440
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-
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Net
cash used in operating activities
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(789,712
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(382,346
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Cash Flows From Investing Activities:
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Proceeds
on sales of property and equipment
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22,497
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-
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Purchase
of short-term investments
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(499,790
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-
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Net
cash used in investing activities
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(477,293
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-
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Cash Flows From Financing Activities:
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Proceeds
from common shares subscribed
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45,000
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-
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Net
cash provided by financing activities
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45,000
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-
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Effect
of exchange rate changes on cash and cash equivalents
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18,472
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19,214
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Net
change in cash and cash equivalents
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(1,203,533
)
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(363,132
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Cash
and cash equivalents, beginning of period
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5,030,583
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3,730,230
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Cash and cash equivalents, end of period
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$
3,827,050
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$
3,367,098
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The
accompanying notes are an integral part of these condensed interim
consolidated financial statements.
5
E
desa Biotech, Inc.
Condensed
Interim Consolidated Statements of Changes in
Shareholders'
Equity
(Unaudited)
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Shares
#
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Common
Shares
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Common
Shares Subscribed
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Class A
Preferred Shares
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Additional
Paid-in Capital
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Accumulated
Other Comprehensive Loss
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Accumulated
Deficit
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Total
Shareholders' Equity
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Balance
- September 30, 2019
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7,504,468
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$
12,005,051
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$
-
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$
-
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$
327,768
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$
(342,074
)
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$
(6,734,615
)
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$
5,256,130
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Common shares
subscribed
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-
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-
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45,000
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-
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-
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-
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-
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45,000
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Share-based
compensation
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-
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-
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-
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-
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8,775
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-
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-
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8,775
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Net loss and
comprehensive loss
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-
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-
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-
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-
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-
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18,114
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(1,094,333
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(1,076,219
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Balance
- December 31, 2019
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7,504,468
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$
12,005,051
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$
45,000
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$
-
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$
336,543
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$
(323,960
)
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$
(7,828,948
)
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$
4,233,686
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Balance
- September 30, 2018
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3,239,902
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$
1,111,253
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$
-
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$
5,945,520
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$
219,358
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$
(447,733
)
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$
(3,278,253
)
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$
3,550,145
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Preferred return
for Class A preferred shares
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-
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-
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-
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118,493
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-
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-
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(118,493
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-
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Share-based
compensation
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-
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-
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-
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-
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11,434
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-
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-
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11,434
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Net loss and
comprehensive loss
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-
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-
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-
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-
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-
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17,760
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(364,849
)
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(347,089
)
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Balance
- December 31, 2018
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3,239,902
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$
1,111,253
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$
-
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$
6,064,013
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$
230,792
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$
(429,973
)
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$
(3,761,595
)
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$
3,214,490
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The
accompanying notes are an integral part of these condensed interim
consolidated financial statements.
6
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E
desa Biotech, Inc.
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Notes
to Condensed Interim Consolidated Financial Statements
(Unaudited)
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1.
Nature of
operations
Edesa
Biotech, Inc. (the “Company” or “Edesa”) is
a biopharmaceutical company focused on acquiring, developing and
commercializing clinical stage drugs for dermatological and
gastrointestinal indications with clear unmet medical needs. The
Company is organized under the laws of British Columbia, Canada and
is headquartered in Markham, Ontario.
In June
2019, the Company changed its name from Stellar Biotechnologies,
Inc. to Edesa Biotech, Inc. following a reverse acquisition with
Edesa Biotech Research, Inc., formerly known as Edesa Biotech Inc.,
a company organized under the laws of the province of Ontario. At
the closing of the transaction, which occurred on June 7, 2019, the
Company acquired the entire issued share capital of Edesa Biotech
Research, Inc., with Edesa Biotech Research, Inc., becoming a
wholly-owned subsidiary of the Company. Also, on June 7, 2019, in
connection with and following the completion of the reverse
acquisition, the Company effected a 1- for-6 reverse split of its
common shares.
The
Company’s common shares trade on The Nasdaq Capital Market in
the United States under the symbol “EDSA”.
2.
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 Transition Report on Form 10-KT for the
nine-month period ended September 30, 2019, which were filed with
the Securities and Exchange Commission (SEC) on December 12,
2019.
The
accompanying condensed interim consolidated financial statements
include the accounts of the Company, its wholly-owned subsidiaries,
Edesa Biotech Research, Inc., an Ontario corporation, and Stellar
Biotechnologies, 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 three months ended December 31, 2019 are not necessarily
indicative of the results that may be expected for other interim
periods or the fiscal year ending September 30, 2020. The condensed
interim consolidated financial data at December 31, 2018 is derived
from Edesa Biotech Research, Inc.’s audited financial
statements for the year ended December 31, 2018. Upon the
completion of the reverse acquisition, Edesa Biotech Research, Inc.
changed its fiscal year end from December 31 to September 30 to
align with the Company’s fiscal year end.
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.
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,
Stellar Biotechnologies, Inc., functional currency. The functional
currency of the Company’s wholly-owned subsidiary, Edesa
Biotech Research, Inc., as determined by management, is Canadian
dollars.
Adoption of recent accounting pronouncements
On
October 1, 2019, the Company adopted Accounting Standards
Codification (ASC) Topic 842
Leases
using the modified retrospective
transition method, applying the new standard to all leases existing
at the date of initial application. In addition, the Company
elected the package of practical expedients in
transition, which permitted the Company not to reassess prior
conclusions about lease identification, lease classification and
initial direct costs on leases that commenced prior to adoption of
the new standard. The Company also elected the ongoing practical
expedient not to recognize operating lease right-of-use assets and
operating lease liabilities for short-term leases. As a result of
adopting the new standard, the Company recognized operating lease
right-of-use (“ROU”) assets of approximately $234,000
and operating lease liabilities of approximately $234,000 on the
balance sheet for one operating lease with a term longer than 12
months at adoption. There was no impact to opening accumulated
deficit. The Company has 3 short-term operating leases that do not
follow the ROU model.
3. Short-term investments
Short-term
investments consisted of U.S. Treasury Bills at December 31,
2019.
U.S.
Treasury Bills are carried at amortized cost which approximates
fair value and are classified as held-to-maturity
investments.
7
4.
Property and
equipment
Property
and equipment, net consisted of the
following:
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December 31,
2019
|
September 30,
2019
|
|
|
|
|
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Computer
equipment
|
$
43,058
|
$
42,910
|
|
Furniture
and equipment
|
8,031
|
7,932
|
|
|
|
|
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51,089
|
50,842
|
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Less:
accumulated depreciation
|
(31,693
)
|
(29,194
)
|
|
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Depreciable
assets, net
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$
19,396
|
$
21,648
|
|
|
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Assets
not in service
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28,913
|
51,410
|
|
|
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Total
property and equipment, net
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$
48,309
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$
73,058
|
Assets
not in service represent equipment for sale held on consignment by
a third party.
Depreciation expense amounted to $2,403 and $412 for the three
months ended
December 31
, 2019
and 2018, respectively.
5. Leases
Operating leases
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
are as follows:
|
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Balance Sheet Caption
|
December 31,
2019
|
|
Assets:
|
|
|
|
Operating
lease assets
|
Operating
lease right-of-use assets
|
$
213,848
|
|
|
|
|
|
Liabilities:
|
|
|
|
Current:
|
|
|
|
Operating
lease liabilities
|
Short-term
operating lease liabilities
|
$
66,631
|
|
Long-term:
|
|
|
|
Operating
lease liabilities
|
Long-term
operating lease liabilities
|
151,514
|
|
|
|
|
|
Total
lease liabilities
|
|
$
218,145
|
8
The
components of lease cost are as follows:
|
|
Statements of Operations Caption
|
Three Months Ended
December 31,
2019
|
|
Operating
lease cost
|
Operating
lease liabilities
|
$
19,439
|
Lease
terms and discount rates are as follows:
|
|
December 31,
2019
|
|
Remaining
lease term (months):
|
36
|
|
Estimated
incremental borrowing rate:
|
6.5
%
|
The
approximate future minimum lease payments under the operating
leases at December 31, 2019 are as follows:
|
Year Ending
|
|
|
September
30, 2020
|
$
59,136
|
|
September
30, 2021
|
80,457
|
|
September
30, 2022
|
80,993
|
|
September
30, 2023
|
20,248
|
|
|
|
|
Total
lease payment
|
240,834
|
|
Less
imputed interest
|
22,689
|
|
|
|
|
Present
value of lease liabilities
|
218,145
|
|
Less
current installments
|
66,631
|
|
|
|
|
Long-term
lease liabilities excluding current installments
|
$
151,514
|
Cash
flow information is as follows:
|
|
Statement of Cash Flows
Caption
|
Three Months Ended
December 31,
2019
|
|
Cash
paid for amounts included in the measurement of lease
liabilities
|
Operating lease
liabilities
|
$
19,440
|
The
Company also leases facilities through its California subsidiary
under three operating leases that expire in June and September
2020. The Company does not intend to exercise options to extend
these leases. Future minimum lease payments during the year ending
September 30, 2020 are approximately $133,000. Total rent under
these leases
included
in general and administrative expenses was
$54,779 for the three months ended
December
31
, 2019
. There was no rent
under these leases
during the three months ended
December 31, 2018 prior to the completion of the reverse
acquisition on June 7, 2019.
9
6.
Commitments
Research and other commitments
The
Company contracted research organizations who perform clinical
trials for the Company’s on-going clinical studies and other
service providers. Aggregate future contractual payments to those
service organizations at December 31
,
2019 are as follows:
|
Year Ending
|
|
|
September
30, 2020
|
$
2,150,000
|
|
September
30, 2021
|
43,000
|
|
September
30, 2022
|
4,000
|
|
|
|
|
|
$
2,197,000
|
License and royalty commitments
In
2016, through its Ontario subsidiary, the Company entered into a
license agreement with a third party to obtain exclusive rights to
certain know-how, patents and data relating to a pharmaceutical
product. The Company will use the exclusive rights to develop the
product for therapeutic, prophylactic and diagnostic uses in
topical dermal applications and anorectal applications. No
intangible assets have been recognized under the license agreement
with the third party as of December 31, 2019 and September 30,
2019. Under the license agreement, the Company is committed to
payments of various amounts to the third party upon meeting certain
milestones outlined in the license agreement, up to an aggregate
amount of $18.6 million. Upon divestiture of substantially all of
the assets of the Company, the Company shall pay the third party a
percentage of the valuation of the licensed technology sold as
determined by an external objective expert. The Company also has a
commitment to pay the third party a royalty based on net sales of
the product in countries where the Company, or an affiliate,
directly commercializes the product and a percentage of
sublicensing revenue received by the Company and its affiliates in
the countries where it does not directly commercialize the product.
No license or royalty payments were made to the third party during
the three months ended December 31, 2019 and 2018.
In
2016, also through its Ontario subsidiary, the Company entered into
an exclusive license agreement with another third party to obtain
exclusive rights to certain know-how, patents and data relating to
a pharmaceutical product. No intangible assets have been recognized
under the license agreement as of December 31, 2019 and September
30, 2019. Under the license agreement, the Company is committed to
payments of up to a total of $18.5 million upon meeting certain
milestones outlined in the license agreement. The Company also has
a commitment to pay a royalty based on net sales of the product in
the countries where the Company directly commercializes the product
and a percentage of sublicensing revenue received by the Company
and its affiliates in the countries where it does not directly
commercialize the product. No license or royalty payments were made
to the third party during the three months ended December 31, 2019
and 2018.
Related party commitments
On
August 14, 2002, through its California subsidiary, the Company
entered into a patent royalty agreement with a director of the
Company, whereby he would receive royalty payments in exchange for
assignment of his patent rights to the Company. The royalty is 5%
of gross receipts from products using this invention in excess of
$500,000 annually.
Retirement savings plan 401(k) contributions
Executive
officers and employees of the California subsidiary are eligible to
receive the Company’s non-elective safe harbor employer
contribution of 3% of eligible compensation under a 401(k) plan to
provide retirement benefits. Employees are 100% vested in employer
contributions and in any voluntary employee contributions.
Contributions to the 401(k) plan were $1,556 during the three
months ended December 31, 2019. There are no 401(k) contributions
during the three months ended December 31, 2018 prior to the
completion of the reverse acquisition on June 7, 2019.
7.
Capital
shares
Reverse Share Split
On June 7, 2019, the Company effected a reverse split of the
Company's common shares at a ratio of 1-for-6. As a result of the
reverse split, every six shares of the issued and outstanding
common shares, without par value, consolidated into one newly
issued outstanding common share, without par value, after
fractional rounding. All shares and exercise prices are presented
on a post-split basis in these condensed interim consolidated
financial statements.
Black-Scholes option valuation model
The Company uses the Black-Scholes option valuation model to
determine the fair value of share-based compensation for share
options and compensation warrants granted. Option valuation models
require the input of highly subjective assumptions including the
expected price volatility. The Company has used historical
volatility to estimate the volatility of the share price. Changes
in the subjective input assumptions can materially affect the fair
value estimates, and therefore the existing models do not
necessarily provide a reliable single measure of the fair value of
the Company’s warrants and share options.
10
Warrants
A
summary of the Company’s warrants activity is as
follows:
|
|
Number of
Warrants (#)
|
Weighted Average
Exercise Price
|
|
Balance
– December 31, 2018
|
-
|
$
-
|
|
|
|
|
|
Effect of reverse
acquisition
|
362,430
|
31.60
|
|
Black-Scholes value
payout
|
(313,516
)
|
33.01
|
|
|
|
|
|
Balance
– September 30, 2019 and December 31, 2019
|
48,914
|
$
11.19
|
The
weighted average contractual life remaining on the outstanding
warrants at December 31, 2019 is 46 months.
The
following table summarizes information about the warrants
outstanding at December 31, 2019:
|
Number of Warrants
(#)
|
Exercise
Prices
|
Expiry
Dates
|
|
28,124
|
$
15.90
|
May 2023
|
|
20,790
|
4.81
|
June 2024
|
|
48,914
|
|
|
Share
Options
The
Company adopted
an
Equity Incentive
Compensation Plan in 2019 (the 2019 Plan) administered by the Board
of Directors, which amended and restated the 2017 Incentive
Compensation Plan (the 2017 Plan). Options, restricted shares and
restricted share units are eligible for grant under the 2019 Plan.
The number of shares available for issuance under the 2019 Plan is
1,153,147, including shares available for the exercise of
outstanding options under the 2017 Plan
. Option holders
under the Edesa Share Option Plan received substitute options under
the Incentive Plan upon completion of the reverse
acquisition.
The
Company's 2019 Plan allows options to be granted to directors,
officers, employees and certain external consultants and advisers.
Under the 2019 Plan, the option term is not to exceed 10 years and
the exercise price of each option is determined by
the independent members of
the Board of
Directors.
Options
have been granted under the Incentive Plan allowing the holders to
purchase common shares of the Company as follows:
|
|
Number of
Options (#)
|
Weighted Average
Exercise Price
|
|
Balance
– December 31, 2018
|
315,123
|
$
1.65
|
|
|
|
|
|
Effect of reverse
acquisition
|
7,787
|
124.80
|
|
Expired
|
(3,265
)
|
125.75
|
|
|
|
|
|
Balance
– September 30, 2019
|
319,645
|
$
3.39
|
|
|
|
|
|
Expired
|
(119
)
|
80.66
|
|
|
|
|
|
Balance
– December 31, 2019
|
319,526
|
$
3.40
|
The Company granted share options subsequent to December 31, 2019
as described in Note 12 Subsequent
events.
11
The
weighted average contractual life remaining on the outstanding
options at December 31, 2019 is 93 months.
The
following table summarizes information about the options under the
Incentive Plan outstanding and exercisable at December 31,
2019:
|
Number of
Options (#)
|
Exercisable
at
December 31,
2019 (#)
|
Range of
Exercise
Prices
|
Expiry
Dates
|
|
|
|
|
|
|
315,123
|
264,520
|
C$
2.16
|
Aug 2027-Dec
2028
|
|
214
|
214
|
C$
243.60
|
May
2020
|
|
214
|
214
|
C$
638.40
|
Nov
2021
|
|
3,499
|
3,499
|
$
35.28 - 93.24
|
Sep 2023-Mar
2025
|
|
238
|
238
|
$
304.08
|
Dec
2022
|
|
238
|
238
|
$
768.60
|
Nov
2020
|
|
319,526
|
268,923
|
|
|
The fair value of options granted during the three months ended
December 31, 2018 was estimated using the Black-Scholes Option
Pricing Model using the following assumptions:
|
Risk
free interest rate
|
1.98
%
|
|
Expected
life (years)
|
4
|
|
Expected
share price volatility
|
79.46
%
|
|
Expected
dividend yield
|
0
%
|
No
share options were granted during the three months ended December
31, 2019.
The
Company recorded $8,775 and $11,434 of share-based compensation
expenses for the three months ended December 31, 2019 and 2018
respectively.
As of
December 31, 2019, the Company had approximately $21,000 of
unrecognized share-based compensation expense, which is expected to
be recognized over a period of 24 months.
Issued and outstanding common shares:
|
|
Number of Common Shares (#)
|
Common Shares
|
|
Balance
– December 31, 2018
|
3,239,902
|
$
1,111,253
|
|
|
|
|
|
Conversion
of preferred shares upon reverse acquisition
|
3,376,112
|
$
6,260,299
|
|
Share
consideration transferred upon reverse acquisition
|
888,454
|
4,633,499
|
|
|
|
|
|
Balance
– September 30, 2019 and December 31, 2019
|
7,504,468
|
$
12,005,051
|
Common shares subscribed:
The Company received proceeds and common share subscription
agreements prior to December 31, 2019 related to the registered
direct offering of common shares that closed on January 8, 2020 as
described in Note 12 Subsequent events.
|
|
Common Shares Subscribed
|
|
Balance
– December 31, 2018 and September 30, 2019
|
$
-
|
|
|
|
|
Common
shares subscribed
|
45,000
|
|
|
|
|
Balance
– December 31, 2019
|
$
45,000
|
12
Issued and outstanding preferred shares:
|
|
Class A Preferred Shares (#)
|
Class A Preferred Shares
|
|
Balance
– December 31, 2018
|
1,007,143
|
$
6,064,013
|
|
|
|
|
|
Preferred
return on Class A preferred shares
|
-
|
196,286
|
|
Conversion
upon reverse acquisition
|
(1,007,143
)
|
(6,260,299
)
|
|
|
|
|
|
Balance
– September 30, 2019 and December 31, 2019
|
-
|
$
-
|
Following
the completion of the reverse acquisition on June 7, 2019, all the
outstanding Class A preferred shares and accumulated accrued
preferred return were fully converted to 3,376,112 common shares
based on the fair market value upon conversion. Prior to
conversion, the Class A preferred shares had the following
features.
The Class A preferred shares were voting and convertible into
common shares at the option of the holder at any time. Upon the
occurrence of a liquidation event, as defined in the resolutions of
the shareholders dated August 28, 2017, the Class A preferred
shares had a liquidation amount preference over the rights of
holders of common shares or any class of shares ranking junior to
Class A preferred shares. The Class A preferred shares also
contained an 8% preferred return that accrued daily and compounded
annually and was payable in shares upon conversion.
The Company evaluated the convertible preferred shares and the
embedded conversion option. The embedded conversion option does not
meet the criteria for bifurcation and has therefore been classified
to equity.
8.
Financial
instruments
(a) Fair values
The Company uses the fair value measurement framework for valuing
financial assets and liabilities measured on a recurring basis in
situations where other accounting pronouncements either permit or
require fair value measurements.
Fair value of a financial instrument is the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date.
The Company follows the fair value hierarchy which requires an
entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. Observable
inputs are inputs that reflect assumptions market participants
would use in pricing the asset or liability developed based on
market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Company's own
assumptions about the assumptions market participants would use in
pricing the asset or liability developed based on the best
information available in the circumstances.
There are three levels of inputs that may be used to measure fair
value:
●
Level
1 - Observable inputs that reflect quoted prices (unadjusted) for
identical assets or liabilities in active markets.
●
Level
2 - Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or
indirectly. Level 2 inputs include quoted prices for similar assets
or liabilities in active markets, or quoted prices for identical or
similar assets and liabilities in markets that are not
active.
●
Level
3 - Unobservable inputs for the asset or liability that are
supported by little or no market activity.
The carrying value of certain financial instruments such as cash
and cash equivalents, accounts and other receivable, accounts
payable and accrued liabilities approximates fair value due to the
short-term nature of such instruments. Short-term investments in
U.S. Treasury Bills are recorded at amortized cost, which
approximates fair value using level 1 inputs.
(b) Interest rate and credit risk
Interest rate risk is the risk that the value of a financial
instrument might be adversely affected by a change in interest
rates. The Company does not believe that the results of operations
or cash flows would be affected to any significant degree by a
significant change in market interest rates, relative to interest
rates on cash and cash equivalents due to the short-term nature of
these balances.
The Company is also exposed to credit risk at period end from the
carrying value of its cash and cash equivalents and accounts and
other receivable. The Company manages this risk by maintaining bank
accounts with Canadian Chartered Banks, U.S. banks believed to
be credit worthy and U.S. Treasury Bills. The Company’s
cash is not subject to any external restrictions. The Company
assesses the collectability of accounts receivable through a review
of the current aging, as well as an analysis of historical
collection rates, general economic conditions and credit status of
customers. Credit risk for HST refunds receivable is not
considered significant since amounts are due from the Canada
Revenue Agency.
13
(c) Foreign exchange risk
The
Company and its subsidiary have balances in Canadian dollars that
give rise to exposure to foreign exchange (“FX”) risk
relating to the impact of translating certain non-U.S. dollar
balance sheet accounts as these statements are presented in U.S.
dollars. A strengthening U.S. dollar will lead to a FX loss while a
weakening U.S. dollar will lead to a FX gain. The Company has not
entered into any agreements or purchased any instruments to hedge
possible currency risks. At December 31, 2019, the Company and its
Canadian subsidiary had assets of C$2.0 million and the U.S. dollar
was equal to 1.3017 Canadian dollars. Based on the exposure at
December 31, 2019, a 10% annual change in the Canadian/U.S.
exchange rate would impact the Company’s loss and other
comprehensive loss by approximately $151,000.
(d) Liquidity risk
Liquidity
risk is the risk that the Company will encounter difficulty raising
liquid funds to meet commitments as they fall due. In meeting its
liquidity requirements, the Company closely monitors its forecasted
cash requirements with expected cash drawdown.
9.
Segmented
information
The
Company's operations comprise a single reportable segment engaged
in the research and development, manufacturing and
commercialization of innovative pharmaceutical products. As the
operations comprise a single reportable segment, amounts disclosed
in the financial statements for loss for the period, depreciation
and total assets also represent segmented amounts.
10.
Loss per
share
The
Company had securities outstanding which could potentially dilute
basic EPS in the future but were excluded from the computation of
diluted loss per share in the periods presented, as their effect
would have been anti-dilutive.
11.
Related party
transactions
During
the periods presented, the Company incurred the following related
party transactions:
●
During the three
months ended December 31, 2019 and 2018, the Company incurred rent
expense of $19,440 and $19,804 from a related company,
respectively. These transactions are in the normal course of
operations and are measured at the exchange amount, which is the
amount of consideration established and agreed to by both
parties.
●
No royalty expenses
to a director related to product sales by the California subsidiary
were incurred during the three months ended December 31, 2019 and
2018. Included in accounts payable and accrued liabilities at
December 31, 2019 was royalty payable of $23,457 to that director
for product sales by the California subsidiary during
2019.
12.
Subsequent
events
Registered direct offering
On
January 8, 2020, the Company closed a registered direct offering of
1,354,691 common shares, no par value (the Common Shares) and
concurrent private placement of Class A Purchase Warrants to
purchase an aggregate of up to 1,016,036 Common Shares and Class B
Purchase Warrants to purchase an aggregate of up to 677,358 Common
Shares. Gross proceeds were $4.36 million, before deducting
placement agent fees and offering expenses of
approximately $0.44 million.
The
Class A Purchase Warrants will be exercisable on or after July
8, 2020, at an exercise price of $4.80 per share and will expire
on July 8, 2023. The Class B Purchase Warrants will be
exercisable on or after July 8, 2020, at an exercise
price of $4.00 per share and will expire on the November 8,
2020. In connection with the offering, the Company also issued
warrants to purchase an aggregate of 12,364 common shares to
certain affiliated designees of the placement agent as part of the
placement agent’s compensation. The placement agent
warrants will be exercisable on or after July 6,
2020, at an exercise price of $3.20 per share, and will expire
January 6, 2025.
Share options
On
February 12, 2020, the independent directors of the Board of
Directors granted a total of 352,365 options to directors, officers
and employees of the Company pursuant to the 2019 Equity Incentive
Compensation Plan. The options have a term of 10 years with
33% vesting on the grant date, with a pro rata amount of the
balance vesting monthly for the next 36 months and an exercise
price equal to the Nasdaq closing price on the grant
date.
14
I
tem 2. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations.
The following management’s discussion and analysis of our
financial condition and results of operations should be read in
conjunction with the unaudited condensed interim consolidated
financial statements and notes thereto included in Part I, Item 1
of this Quarterly Report on Form 10-Q as of December 31, 2019 and
our audited consolidated financial statements for the nine-month
period ended September 30, 2019 included in our Annual Transition
Report on Form 10-KT, filed with the Securities and Exchange
Commission on December 12, 2019.
This Quarterly Report on Form 10-Q contains forward-looking
statements. When used in this report, the words
“expects,” “anticipates,”
“suggests,” “believes,”
“intends,” “estimates,”
“plans,” “projects,”
“continue,” “ongoing,”
“potential,” “expect,”
“predict,” “believe,” “intend,”
“may,” “will,” “should,”
“could,” “would” and similar expressions
are intended to identify forward-looking statements. You should not
place undue reliance on these forward-looking statements. Our
actual results could differ materially from those anticipated in
the forward-looking statements for many reasons, including the
risks described in our Annual Transition Report on Form 10-KT for
the nine-month period ended September 30, 2019 and other reports we
file with the Securities and Exchange Commission. Although we
believe the expectations reflected in the forward-looking
statements are reasonable, they relate only to events as of the
date on which the statements are made. We do not intend to update
any of the forward-looking statements after the date of this report
to conform these statements to actual results or to changes in our
expectations, except as required by law.
The discussion and analysis of our financial condition and results
of operations are based on our unaudited condensed interim
consolidated financial statements as of December 31, 2019 and
September 30, 2019, and for the three months ended December 31,
2019 and 2018 included in Part I, Item 1 of this Quarterly Report
on Form 10-Q, which we have prepared in accordance with U.S.
generally accepted accounting principles. The preparation of these
financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements, as well as the reported revenues and expenses
during the reporting periods. On an ongoing basis, we evaluate such
estimates and judgments, including those described in greater
detail below. We base our estimates on historical experience and on
various other factors that we believe are reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
Overview
We are a biopharmaceutical company focused on acquiring, developing
and commercializing clinical-stage drugs for dermatological and
gastrointestinal indications with clear unmet medical needs. Our
lead product candidate, EB01, is an sPLA
2
inhibitor
for the topical treatment of chronic allergic contact dermatitis
(ACD), a common, potentially debilitating condition and
occupational illness. Our investigational new drug application for
EB01 was accepted by the U.S. Food and Drug Administration FDA in
November 2018 and we initiated patient enrollment for a Phase 2B
clinical study evaluating EB01 in October 2019.
We also intend to expand the utility of our sPLA
2
inhibitor
technology, which forms the basis for EB01, across multiple
indications. For example, in September 2019, we received
approval from Health Canada to begin a proof-of-concept clinical
study of EB02, an sPLA
2
inhibitor,
as a potential treatment for patients with hemorrhoids disease
(HD). In addition to EB01 and EB02, we plan to expand our portfolio
with drug candidates to treat other skin and gastrointestinal
conditions. As a clinical-stage company, we have not generated
revenue from our product candidates to
date.
Significant Accounting Policies and Estimates
Edesa’s significant accounting policies are described in Note
3 to our audited consolidated financial statements for the
nine-month period ended September 30, 2019 included in our Annual
Transition Report on Form 10-KT, filed with the Securities and
Exchange Commission on December 12, 2019. There are no significant
changes in those policies for the quarter ended December 31, 2019
except that we adopted Accounting Standards Codification (ASC)
Topic 842
Leases
on October 1, 2019, as discussed in Note 2 to this
quarterly report.
Results of Operations
Financial results for any periods ended prior to June 7, 2019
reflect the financials of our subsidiary Edesa Biotech Research,
Inc. on a standalone basis.
Comparison of the Three Months Ended December 31, 2019 and
2018
Our total revenues for the three months ended December 31, 2019
were $0.11 million, reflecting sale of product inventory obtained
in the reverse acquisition completed in June 2019. There were no
revenues for the three months ended December 31, 2018.
Total operating expenses increased by $0.80 million to $1.21
million for the three months ended December 31, 2019 compared to
$0.41 million for the same period last year:
●
Our
cost of sales and services was less than $0.01 million for the
three months ended December 31, 2019, reflecting the sales of
product inventory obtained in the reverse acquisition. There were
no product sales in the same period last year.
●
Our
research and development expenses increased by $0.27 million to
$0.53 million for the three months ended December 31, 2019 compared
to $0.26 million for the same period last year. The increase was
primarily due to increased external research expenses related to
the initiation of clinical studies for our EB01 drug product
candidate as well as higher personnel expenses.
●
Our
general and administrative expenses increased by $0.53 million to
$0.68 million for the three months ended December 31, 2019 compared
to $0.15 million for the same period last year. The increase was
primarily due to
increased
salaries and related personnel expenses,
increased legal and
professional fees, and public company expenses.
15
Total other income decreased by $0.03 million to $0.01 million for
the three months ended December 31, 2019 compared to $0.04 million
for the same period last year primarily due to fluctuations in
Canadian dollar exchange rates. Interest income was relatively
unchanged.
Our net loss for the three months ended December 31, 2019 was $1.09
million, or $0.15 per basic share, compared to a net loss of $0.36
million, or $0.11 per basic share, for the three months ended
December 31, 2018.
Capital Expenditures
Our
capital expenditures primarily consist of purchases of computer and
office equipment. There were no significant capital expenditures
for the three months ended
December
31
, 2019 and 2018.
Liquidity and Capital Resources
Our operations have historically been funded through issuances of
preferred shares that were converted into common shares, loans that
were converted into common shares and government grants. As a
clinical-stage company we have not generated significant revenue,
and we expect to incur operating losses as we continue our efforts
to acquire, develop, seek regulatory approval for and commercialize
product candidates and execute on our strategic initiatives. For
the three-month periods ended December 31, 2019 and December
31, 2018, we reported net losses of $1.10 million and $0.36
million, respectively.
At December 31, 2019, we had cash and cash equivalents and
short-term investments of $4.33 million, working capital of $4.12
million, shareholders’ equity of $4.23 million and an
accumulated deficit of $7.83 million. On January 8, 2020, we
completed a registered direct offering and concurrent private
placement resulting in gross proceeds of $4.36 million, before
deducting fees to the placement agent and other estimated offering
expenses payable by the Company.
We plan to finance company operations over the course of the next
twelve months with cash and cash equivalents and short-term
investments on hand. Management has flexibility to adjust this
timeline by a making changes to planned expenditures related to,
among other factors, the size and timing of clinical trial
expenditures, staffing levels, and the acquisition or in-licensing
of new product candidates. To help fund our operations and meet our
obligations, we may also seek additional financing through the sale
of equity, debt financings or other capital sources, including
potential future licensing, collaboration or similar arrangements
with third parties or other strategic transactions.
Research and Development
Our
primary business is the development of innovative therapeutics for
dermatological and gastrointestinal indications with clear unmet
medical needs. We focus our resources on research and development
activities, including the conduct of clinical studies and product
development, and expense such costs as they are incurred. Our
research and development expenses have primarily consisted of
employee-related expenses, including salaries, benefits, taxes,
travel, and share-based compensation expense for personnel in
research and development functions; expenses related to process
development and production of product candidates paid to contract
manufacturing organizations, including the cost of acquiring,
developing, and manufacturing research material; costs associated
with clinical activities, including expenses for contract research
organizations; and clinical trials and activities related to
regulatory filings for our product candidates, including regulatory
consultants. Our research and development costs were $0.53 million
and $0.26 million for the three months ended December 31, 2019 and
2018, respectively. The increase was due primarily to an increase
in clinical research expenses associated with the Phase 2B clinical
study of our EB01 product candidate as well as higher personnel
expenses.
Off-Balance Sheet Arrangements
We have
no off-balance sheet arrangements that have or are reasonably
likely to have a current or future material effect on our financial
condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital
resources.
I
tem 3. Quantitative and Qualitative
Disclosures About Market Risk.
As a
“smaller reporting company,” as defined by Rule 12b-2
of the Exchange Act, and pursuant to Item 305 of Regulation S-K, we
are not required to provide quantitative and qualitative
disclosures about market risk.
I
tem 4. Controls and
Procedures.
Disclosure Controls and Procedures
Our
management is responsible for establishing and maintaining
disclosure controls and procedures to provide reasonable assurance
that material information related to our Company, including our
consolidated subsidiaries, is made known to senior management,
including our Chief Executive Officer and Chief Financial Officer,
by others within those entities on a timely basis so that
appropriate decisions can be made regarding public
disclosure.
We
carried out an evaluation, under the supervision and with the
participation of our management, including our Principal Executive
Officer and our Principal Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the
Securities and Exchange Act of 1934, as amended) as of
December 31
, 2019. Our Chief Executive
Officer and Chief Financial Officer concluded that the disclosure
controls and procedures, as of
December 31
, 2019, were
effective.
Changes in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting
that occurred during the quarter ended
December 31
, 2019 that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
16
PART II — OTHER INFORMATION
I
tem 1. Legal Proceedings.
From
time to time, we may be involved in legal proceedings, claims and
litigation arising in the ordinary course of business. We are not
currently a party to any material legal proceedings or claims
outside the ordinary course of business. Regardless of outcome,
litigation can have an adverse impact on us because of defense and
settlement costs, diversion of management resources and other
factors.
I
tem 1A. Risk Factors.
There
have been no material changes to the risk factors discussed in Item
1A. Risk Factors in our Annual Transition Report on Form 10-KT for
the year ended September 30, 2019,
filed with the Securities and Exchange Commission
on December 12, 2019
.
I
tem 2. Unregistered Sales of Equity Securities and Use
of Proceeds.
None.
I
tem 3. Defaults Upon Senior Securities.
None.
I
tem 4. Mine Safety Disclosures.
Not
applicable.
I
tem 5. Other Information.
None.
17
I
tem 6. Exhibits.
EXHIBIT INDEX
|
Exhibit
Number
|
|
Description
|
|
|
|
|
|
|
Form of
Class A Purchase Warrant to be issued to investors (included as
Exhibit 4.1 to the Company’s Current Report on Form 8-K filed
on January 6, 2020, and incorporated herein by
reference).
|
|
|
|
|
|
|
|
Form of
Class B Purchase Warrant to be issued to investors (included as
Exhibit 4.2 to the Company’s Current Report on Form 8-K filed
on January 6, 2020, and incorporated herein by
reference).
|
|
|
|
|
|
|
|
Form of
Warrant to be issued to Brookline Capital Markets, a division of
Arcadia Securities, LLC (included as Exhibit 4.3 to the
Company’s Current Report on Form 8-K filed on January 6,
2020, and incorporated herein by reference).
|
|
|
|
|
|
|
|
Form of
Securities Purchase Agreement between Edesa Biotech, Inc. and
certain investors (included as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed on January 6, 2020, and
incorporated herein by reference).
|
|
|
|
|
|
|
|
Form of
Subscription Agreement between Edesa Biotech, Inc. and certain
investors (included as Exhibit 10.2 to the Company’s Current
Report on Form 8-K filed on January 6, 2020, and incorporated
herein by reference).
|
|
|
|
|
|
|
|
Certification
of the Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
Certification
of the Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
Certification
of the Principal Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (*)
|
|
|
|
|
|
|
|
Certification
of the Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (*)
|
|
|
|
|
|
|
101.INS
|
|
XBRL
Instance Document
|
|
|
|
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
|
|
|
|
|
101.CAL
|
|
XBRL
Taxonomy Calculation Linkbase Document
|
|
|
|
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
|
|
|
|
101.LAB
|
|
XBRL
Taxonomy Label Linkbase Document
|
|
|
|
|
|
101.PRE
|
|
XBRL
Taxonomy Presentation Linkbase Document
|
*
Furnished herewith.
A signed original of this written statement required by
Section 906 has been provided to the Company and will be
retained by the Company and furnished to the Securities and
Exchange Commission or its staff upon request.
18
S
IGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
|
Date:
February 13, 2020
|
EDESA BIOTECH, INC.
|
|
|
|
|
|
/s/ Kathi
Niffenegger
|
|
|
Kathi
Niffenegger
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial Officer and Duly Authorized Officer)
|
19
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits