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 March 31, 2020
 
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)
  
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, 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 March 31, 2020
 
Table of Contents
 
PART I — FINANCIAL INFORMATION
3
 
 
3
 
 
3
 
 
4
 
 
5
 
 
6
 
 
7
 
 
17
 
 
21
 
 
21
 
 
PART II — OTHER INFORMATION
21
 
 
21
 
 
21
 
 
21
 
 
21
 
 
21
 
 
21
 
 
22
 
 
 
 
2
 
PART I — FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
Edesa Biotech, Inc.
Condensed Interim Consolidated Balance Sheets
(Unaudited)
 
 
 
March 31,
2020
 
 
September 30,
2019
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $6,989,930 
 $5,030,583 
Accounts and other receivable
  84,091 
  217,101 
Prepaid expenses and deposits
  352,001 
  397,022 
 
    
    
Total current assets
  7,426,022 
  5,644,706 
 
    
    
Property and equipment, net
  25,110 
  73,058 
Operating lease right-of-use assets
  181,492 
  - 
 
    
    
Total assets
 $7,632,624 
 $5,717,764 
 
    
    
 
    
    
Liabilities and shareholders' equity:
    
    
 
    
    
Current liabilities:
    
    
Accounts payable and accrued liabilities
 $516,242 
 $461,634 
Short-term operating lease liabilities
  62,696 
  - 
 
    
    
Total current liabilities
  578,938 
  461,634 
 
    
    
Non-current liabilities:
    
    
Long-term operating lease liabilities
  122,743 
  - 
 
    
    
Total liabilities
  701,681 
  461,634 
 
    
    
Commitments (Note 6)
    
    
 
    
    
Shareholders' equity:
    
    
Capital shares
    
    
   Authorized unlimited common and preferred shares without par value
    
   Issued and outstanding:
    
    
8,859,159 common shares (2019 - 7,504,468)
  14,732,674 
  12,005,051 
Additional paid-in capital
  1,880,721 
  327,768 
Accumulated other comprehensive loss
  (363,868)
  (342,074)
Accumulated deficit
  (9,318,584)
  (6,734,615)
 
    
    
Total shareholders' equity
  6,930,943 
  5,256,130 
 
    
    
Total liabilities and shareholders' equity
 $7,632,624 
 $5,717,764 
 
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
 
3
 
 
Edesa Biotech, Inc.
Condensed Interim Consolidated Statements of Operations
(Unaudited)
 
 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
March 31, 2020
 
 
March 31, 2019
 
 
March 31, 2020
 
 
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Product sales and services
 $110,516 
 $- 
 $218,316 
 $- 
 
    
    
    
    
Expenses:
    
    
    
    
Cost of sales and services
  10,037 
  - 
  13,815 
  - 
Research and development
  502,814 
  111,702 
  1,030,812 
  369,093 
General and administrative
  1,113,917 
  429,076 
  1,795,623 
  577,426 
 
    
    
    
    
 
  1,626,768 
  540,778 
  2,840,250 
  946,519 
 
    
    
    
    
Loss from Operations
  (1,516,252) 
  (540,778)
  (2,621,934)
  (946,519)
 
    
    
    
    
Other Income (Loss):
    
    
    
    
Interest income
  18,771 
  15,920 
  32,963 
  32,131 
Foreign exchange gain (loss)
  7,845 
  (3,972)
  5,802 
  20,709 
 
    
    
    
    
 
  26,616 
  11,948 
  38,765 
  52,840 
 
    
    
    
    
Loss before income taxes
  (1,489,636)
  (528,830)
  (2,583,169)
  (893,679)
 
    
    
    
    
Income tax expense
  - 
  - 
  800 
  - 
 
    
    
    
    
Net Loss
  (1,489,636)
  (528,830)
  (2,583,969)
  (893,679)
 
    
    
    
    
Exchange differences on translation
  (39,908)
  73,253 
  (21,794)
  91,013 
 
    
    
    
    
Net Loss and Comprehensive Loss
 $(1,529,544)
 $(455,577)
 $(2,605,763)
 $(802,666)
 
    
    
    
    
Weighted average number of common shares
  8,740,065 
  3,239,902 
  8,118,891 
  3,239,902 
 
    
    
    
    
Loss per common share - basic and diluted
 $(0.17)
 $(0.16)
 $(0.32)
 $(0.28)
 
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
 
 
4
 
 
 
Edesa Biotech, Inc.
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
Six Months Ended
 
 
 
March 31, 2020
 
 
March 31, 2019
 
 
 
 
 
 
 
 
Cash Flows From Operating Activities:
 
 
 
 
 
 
Net loss
 $(2,583,969)
 $(893,679)
Adjustments for:
    
    
Depreciation
  5,054 
  916 
Straight-line operating lease expense
  38,571 
  - 
Share-based compensation
  388,775 
  24,880 
Change in working capital items:
    
    
Accounts and other receivable
  127,146 
  (16,357)
Prepaid expenses and deposits
  27,030 
  (8,720)
Accounts payable and accrued liabilities
  75,806 
  111,732 
Operating lease liabilities
  (38,572)
  - 
 
    
    
Net cash used in operating activities
  (1,960,159)
  (781,228)
 
    
    
Cash Flows From Investing Activities:
    
    
Proceeds on sales of property and equipment
  43,184 
  - 
Purchase of property and equipment
  (825)
  (1,504)
Purchase of short-term investments
  (500,000)
  - 
Maturities of short-term investments
  500,000 
  - 
 
    
    
Net cash provided by (used in) investing activities
  42,359 
  (1,504)
 
    
    
Cash Flows From Financing Activities:
    
    
Proceeds from issuance of common shares and warrants
  4,360,500 
  - 
Payments for issuance costs
  (468,699)
  - 
 
    
    
Net cash provided by financing activities
  3,891,801 
  - 
 
    
    
Effect of exchange rate changes on cash and cash equivalents
  (14,654)
  94,643 
 
    
    
Net change in cash and cash equivalents
  1,959,347 
  (688,089)
Cash and cash equivalents, beginning of period
  5,030,583 
  3,730,230 
 
    
    
Cash and cash equivalents, end of period
 $6,989,930 
 $3,042,141 
 
    
    
Supplemental Disclosure of Non-cash Financing Activities: 
    
    
Fair value of placement agent warrants
  18,051 
  - 
 
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
 
 
5
 
 
Edesa Biotech, Inc.
Condensed Interim Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
 
 
 
Shares #
 
 
Common Shares
 
 
Common Shares Subscribed
 
 
Class A Preferred Shares
 
 
Additional Paid-in Capital
 
 
 Accumulated Other Comprehensive Loss
 
 
Accumulated Deficit
 
 
Total Shareholders' Equity
 
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 
 
    
    
    
    
    
    
    
    
Three Months Ended March 31, 2019
    
    
    
    
    
    
    
    
Balance - December 31, 2018
  3,239,902 
 $1,111,253 
 $- 
 $6,064,013 
 $230,792 
 $(429,973)
 $(3,761,595)
 $3,214,490 
 
    
    
    
    
    
    
    
    
Preferred return for Class A preferred shares
  - 
  - 
  - 
  112,980 
  - 
  - 
  (112,980)
  - 
Share-based compensation
  - 
  - 
  - 
  - 
  13,446 
  - 
  - 
  13,446 
Net loss and comprehensive loss
  - 
  - 
  - 
  - 
  - 
  73,253 
  (528,830)
  (455,577)
 
    
    
    
    
    
    
    
    
Balance - March 31, 2019  
  3,239,902 
 $1,111,253 
 $- 
 $6,176,993 
 $244,238 
 $(356,720)
 $(4,403,405)
 $2,772,359 
 
    
    
    
    
    
    
    
    
 
    
    
    
    
    
    
    
    
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 
 
    
    
    
    
    
    
    
    
Six Months Ended March 31, 2019
    
    
    
    
    
    
    
    
Balance - September 30, 2018
  3,239,902 
 $1,111,253 
 $- 
 $5,945,520 
 $219,358 
 $(447,733)
 $(3,278,253)
 $3,550,145 
 
    
    
    
    
    
    
    
    
Preferred return for Class A preferred shares
  - 
  - 
  - 
  231,473 
  - 
  - 
  (231,473)
  - 
Share-based compensation
  - 
  - 
  - 
  - 
  24,880 
  - 
  - 
  24,880 
Net loss and comprehensive loss
  - 
  - 
  - 
  - 
  - 
  91,013 
  (893,679)
  (802,666)
 
    
    
    
    
    
    
    
    
Balance - March 31, 2019
  3,239,902 
 $1,111,253 
 $- 
 $6,176,993 
 $244,238 
 $(356,720)
 $(4,403,405)
 $2,772,359 
 
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
 
6
 
 
Edesa Biotech, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
 
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. 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 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. 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, 2020 are not necessarily indicative of the results that may be expected for other interim periods or the fiscal year ending September 30, 2020.
 
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.
 
 
 
7
 
 
Edesa Biotech, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
 
3. Short-term investments
 
The Company held short-term investments in U.S. Treasury Bills during the three and six months ended March 31, 2020. No amounts were outstanding at March 31, 2020 or September 30, 2019.
 
U.S. Treasury Bills were carried at amortized cost which approximates fair value and classified as held-to-maturity investments. 
 
4. Property and equipment
 
Property and equipment, net consisted of the following:  
 
 
 
 March 31,
2020
 
 
 September 30,
2019
 
 
 
 
 
 
 
 
Computer equipment
 $43,169 
 $42,910 
Furniture and equipment
  7,555 
  7,932 
 
    
    
 
  50,724 
  50,842 
Less: accumulated depreciation
  (33,840)
  (29,194)
 
    
    
Depreciable assets, net
 $16,884 
 $21,648 
 
    
    
Assets not in service
  8,226 
  51,410 
 
    
    
Total property and equipment, net
 $25,110 
 $73,058 
 
Assets not in service represent equipment for sale held on consignment by a third party.
 
Depreciation expense amounted to $5,054 and $916 for the six months ended March 31, 2020 and 2019, respectively, and $2,651 and $504 for the three months ended March 31, 2020 and 2019, respectively.
 
5. 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 are as follows:
 
 
Balance Sheet Caption
 
March 31, 2020
 
Assets:
 
 
 
 
Operating lease assets
Operating lease right-of-use assets
 $181,492 
 
    
Liabilities:
 
    
Current:
 
    
Operating lease liabilities
Short-term operating lease liabilities
 $62,696 
Long-term:
 
    
Operating lease liabilities
Long-term operating lease liabilities
  122,743 
 
    
Total lease liabilities
 
 $185,439 
 
 
8
 
 
Edesa Biotech, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
 
The components of lease cost are as follows:
 
 
Statements of Operations Caption
 
Three Months Ended March 31, 2020
 
 
Six Months Ended March 31, 2020
 
Operating lease cost
General and administrative
 $19,131 
 $38,571 
 
Lease terms and discount rates are as follows:
 
 
 
March 31, 2020
 
Remaining lease term (months):
  33 
Estimated incremental borrowing rate:
  6.5% 
 
The approximate future minimum lease payments under the operating leases at March 31, 2020 are as follows:
 
Year Ending
 
 
 
September 30, 2020
 $36,211 
September 30, 2021
  73,900 
September 30, 2022
  74,393 
September 30, 2023
  18,598 
 
    
Total lease payment
  203,102 
Less imputed interest
  17,663 
 
    
Present value of lease liabilities
  185,439 
Less current installments
  62,696 
 
    
Long-term lease liabilities excluding current installments
 $122,743 
 
Cash flow information is as follows:
 
 
Statement of Cash Flows Caption
 
Six Months Ended March 31, 2020
 
Cash paid for amounts included in the measurement of lease liabilities
Operating lease liabilities
 $38,572 
 
Other operating leases
 
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 $85,000. Total rent under these leases included in general and administrative expenses was $109,847 for the six months ended March 31, 2020, and $55,068 for the three months ended March 31, 2020, respectively. There was no rent under these leases during the three and six months ended March 31, 2019 prior to the completion of the reverse acquisition on June 7, 2019.
  
 
9
 
 
Edesa Biotech, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
 
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 March 31, 2020 are as follows:
 
Year Ending
 
 
 
September 30, 2020
 $1,724,000 
September 30, 2021
  41,000 
September 30, 2022
  19,000 
 
    
 
 $1,784,000 
 
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 March 31, 2020 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 and six months ended March 31, 2020 and 2019.
 
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 March 31, 2020 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 and six months ended March 31, 2020 and 2019.
 
Related party patent royalty 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 $4,535 during the six months ended March 31, 2020, and $2,979 during the three months ended March 31, 2020, respectively. There are no 401(k) contributions during the three and six months ended March 31, 2019 prior to the completion of the reverse acquisition on June 7, 2019.
  
 
10
 
 
Edesa Biotech, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
 
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.
 
Equity Offering
 
On January 8, 2020, the Company closed a registered direct offering of 1,354,691 common shares, no par value and a 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 from the offering amounted to $4,360,500.
 
The Class A Purchase Warrants are 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 are exercisable on or after July 8, 2020, at an exercise price of $4.00 per share and will expire on 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 are exercisable on or after July 6, 2020, at an exercise price of $3.20 per share, and will expire on January 6, 2025.
 
The warrants are considered contracts on the Company’s own shares and are classified as equity. The Company allocated gross proceeds with $3,070,358 as the value of common shares and $1,008,743 as the value of Class A Purchase Warrants and $281,399 as the value of Class B Purchase Warrants under additional paid-in capital in the condensed interim consolidated statements of changes in shareholders’ equity on a relative fair value basis.
 
The direct costs related to the issuance of the common shares and warrants were $468,699. These direct costs were recorded as an offset against gross proceeds with $330,025 being recorded under common shares and $138,674 being recorded under additional paid-in capital on a relative fair value basis. The Company also recorded the fair value of placement agent warrants in the amount of $18,051 as share based compensation to nonemployees under additional paid-in capital and an offset against gross proceeds with $12,710 being recorded under common shares and $5,341 being recorded under additional paid-in capital on a relative fair value basis.
 
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 and the fair value of warrants issued. Option valuation models require the input of highly subjective assumptions including the expected price volatility. The Company calculates expected volatility based on historical volatility of the Company’s share price. When there is insufficient data available, the Company uses a peer group that is publicly traded to calculate expected volatility. 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.
 
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
  48,914 
 $11.19 
 
    
    
Issued
  1,705,758 
  4.47 
 
    
    
Balance – March 31, 2020
  1,754,672 
 $4.66 
 
 
11
 
 
Edesa Biotech, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
 
The weighted average contractual life remaining on the outstanding warrants at March 31, 2020 is 27 months.
 
The following table summarizes information about the warrants outstanding at March 31, 2020:
 
 
Number of Warrants (#)
 
 
Exercise Prices
 
 
Expiry Dates
 
  677,358 
   $4.00 
November 2020
  28,124 
  15.90 
May 2023
  1,016,036 
  4.80 
July 2023
  20,790 
  4.81 
June 2024
  12,364 
  3.20 
January 2025
  1,754,672 
    
 
 
The fair value of warrants issued during the three and six months ended March 31, 2020 was estimated using the Black-Scholes option valuation model using the following assumptions:
 
 
 
 
  Class A Warrants
 
 
 
  Class B Warrants
 
 
 
Placement Agent Warrants
 
Risk free interest rate
  1.61 % 
  1.55 % 
  1.61 % 
Expected life
  3.5 years 
  0.83 years 
  5 years 
Expected share price volatility
  103.81 % 
  134.15 % 
  101.89 % 
Expected dividend yield
  0.00 % 
  0.00 % 
  0.00 % 
 
There were no warrants issued in the three and six months ended March 31, 2019.
 
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 Edesa Biotech Research, Inc.’s option plan received substitute options under the Company’s incentive plan upon completion of the reverse acquisition.
 
 
12
 
 
Edesa Biotech, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
 
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 2019 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 
 
    
    
Granted
  352,365 
  3.16 
Expired
  (119)
  74.09 
 
    
    
Balance – March 31, 2020
  671,891 
 $3.19 
 
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 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.
 
The weighted average contractual life remaining on the outstanding options at March 31, 2020 is 105 months.
 
The following table summarizes information about the options under the Incentive Plan outstanding and exercisable at March 31, 2020:
 
 
 
Number of Options (#)
 
 
 Exercisable at March 31, 2020 (#)
 
 
 
 
 
 Range of Exercise Prices
 
 
Expiry Dates
 
  214 
  214 
  C$ 
  243.60 
May 2020
  238 
  238 
  $ 
  768.60 
Nov 2020
  214 
  214 
  C$ 
  638.40 
Nov 2021
  238 
  238 
  $ 
  304.08 
Dec 2022
  3,499 
  3,499 
  $ 
  35.28 - 93.24 
Sep 2023-Mar 2025
  315,123 
  274,448 
  C$ 
  2.16 
Aug 2027-Dec 2028
  352,365 
  122,836 
  $ 
  3.16 
Feb 2030
  671,891 
  401,687 
    
    
 
 
 
 
13
 
 
Edesa Biotech, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
 
The fair value of option during the six months ended March 31, 2020 and 2019 was estimated using the Black-Scholes option valuation model using the following assumptions:
 
 
 
Six Months Ended  
 
 
Six Months Ended  
 
 
 
March 31, 2020
 
 
March 31, 2019
 
Risk free interest rate
  1.45% 
  1.98% 
Expected life
  5 years 
  4 years 
Expected share price volatility
  104.14% 
  79.46% 
Expected dividend yield
  0.00% 
  0.00% 
 
The Company recorded $388,775 and $24,880 of share-based compensation expenses for the six months ended March 31, 2020 and 2019 respectively, and $380,000 and $13,446 for the three months ended March 31, 2020 and 2019, respectively.
 
As of March 31, 2020, the Company had approximately $482,000 of unrecognized share-based compensation expense, which is expected to be recognized over a period of 35 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
  7,504,468 
 $12,005,051 
 
    
    
Common shares issued
  1,354,691 
 $3,070,358 
Share issuance costs
    
  (342,735)
 
    
    
Balance – March 31, 2020
  8,859,159 
 $14,732,674 
 
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 March 31, 2020
  - 
 $- 
 
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.
 
14
 
 
Edesa Biotech, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
 
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 were 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.
 
 
15
 
 
Edesa Biotech, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
 
 (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 March 31, 2020, the Company and its Canadian subsidiary had assets of C$3.5 million and the U.S. dollar was equal to 1.4712 Canadian dollars. Based on the exposure at March 31, 2020, a 10% annual change in the Canadian/U.S. exchange rate would impact the Company’s loss and other comprehensive loss by approximately $247,000.
 
(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 six months ended March 31, 2020 and 2019, the Company incurred rent expense of $38,571 and $39,106 from a related company, respectively, and $19,131 and $19,302 for the three months ended March 31, 2020 and 2019, 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 six months ended March 31, 2020 and 2019. During the six months ended March 31, 2020, accounts payable and accrued liabilities of $23,457 at September 30, 2019 was paid to that director for product sales by the California subsidiary during 2019.
 
12. Subsequent events
 
On April 17, 2020, the Company entered into an exclusive license agreement with a pharmaceutical development company to obtain exclusive rights relating to certain monoclonal antibodies ("the Constructs"). Unless earlier terminated, the term of the license agreement will remain in effect for twenty-five years from the date of first commercial sale of Licensed Products. Subsequently, the license agreement will automatically renew for five (5) year periods unless either party terminates the agreement in accordance with its terms.
 
In exchange for the exclusive rights to develop and commercialize the Constructs, the Company issued $2.5 million of newly designated Series A-1 Convertible Preferred Shares. In addition, the Company is committed to payments of various amounts upon meeting certain milestones outlined in the license agreement, up to an aggregate amount of $363.5 million. The Company also has a commitment to pay royalties based on net sales of products containing the Constructs in countries where the Company directly commercializes such products and a percentage of sublicensing revenue received by the Company in the countries where it does not directly commercialize such products.
 
In connection with the license agreement and pursuant to a purchase agreement entered into on April 17, 2020, the Company will purchase inventory of one of the Constructs for an aggregate purchase price of $5.0 million, payable in two installments.
 
The outbreak of COVID-19, which was declared a pandemic by the World Health Organization in March 2020, has severely impacted financial markets and global economic activity, and has caused material disruptions to almost every industry directly or indirectly. The duration and impact of the COVID-19 outbreak is unknown at this time and it is not possible to reliably estimate the duration and severity of business shutdowns or disruptions, or the effectiveness of emergency government measures or central bank interventions.
 
 
16
 
 
Item 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 March 31, 2020 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 March 31, 2020 and September 30, 2019, and for the three and six months ended March 31, 2020 and 2019 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 sPLA2 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 sPLA2 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 sPLA2 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 inflammatory and immune-related conditions. As a clinical-stage company, we have not generated revenue from our product candidates to date. 
 
Recent Developments
 
Agreement with NovImmune SA
 
On April 17, 2020, our wholly-owned subsidiary Edesa Biotech Research, Inc. entered into an exclusive license agreement with NovImmune SA, which operates under the brand Light Chain Bioscience, whereby we obtained exclusive rights throughout the world to certain know-how, patents and data relating to the monoclonal antibodies targeting TLR4 and CXCL10 (the Constructs). Edesa will use the exclusive rights to develop products containing the Constructs (the Licensed Products) for therapeutic, prophylactic and diagnostic applications in humans and animals. Unless earlier terminated, the term of the license agreement will remain in effect for twenty-five years from the date of first commercial sale of Licensed Products. Subsequently, the license agreement will automatically renew for five (5) year periods unless either party terminates the agreement in accordance with its terms.
 
 
17
 
 
Under the license agreement, we are exclusively responsible, at our expense, for the research, development manufacture, marketing, distribution and commercialization of the Constructs and Licensed Products and to obtain all necessary licenses and rights. Edesa 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.
 
In exchange for the exclusive rights to develop and commercialize the Constructs, we have issued to NovImmune $2.5 million of newly designated Series A-1 Convertible Preferred Shares pursuant to the terms of a securities purchase agreement entered into between the parties concurrently with the license agreement. In addition, Edesa is committed to payments of various amounts to NovImmune upon meeting certain development, approval and commercialization milestones as outlined in the license agreement up to an aggregate amount of $363.5 million. We also have a commitment to pay NovImmune a royalty based on net sales of Licensed Products in countries where Edesa directly commercializes Licensed Products and a percentage of sublicensing revenue received by Edesa in the countries where Edesa does not directly commercialize Licensed Products.
 
In connection with the license agreement and pursuant to a purchase agreement entered into by the parties on April 17, 2020, we will purchase from NovImmune its inventory of the TLR4 antibody for an aggregate purchase price of $5.0 million, payable in two installments.
 
Equity Offering
 
On January 8, 2020, we completed a registered direct offering of 1,354,691 common shares, no par value, and a 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. We received net proceeds of $3.89 million, after deducting fees to the placement agent and other offering expenses. The Class A Warrants are exercisable beginning July 8, 2020 at a price of $4.80 and expire on July 8, 2023. The short-term Class B Warrants are exercisable beginning July 8, 2020 at a price of $4.00 and expire on November 8, 2020. As part of the placement agent’s compensation for the offering, we also issued warrants to purchase an aggregate of 12,364 common shares to the placement agent. The placement agent warrants are exercisable at a price of $3.20 and expire on January 6, 2025. The net proceeds will be used for working capital, including research and development expenses, and held in temporary investments and cash equivalents until expended.
 
Phase 2B Clinical Study of EB01
 
In April 2020, we filed a protocol amendment with the FDA for our ongoing Phase 2B clinical study in allergic contact dermatitis. The amendment provides for, among other changes, a reduction in the number of in-person office visits, allowances for remote telehealth appointments and other procedural updates to simplify enrollment and patient care. The changes to the protocol are designed, in part, to respond to and mitigate the impacts of the COVID-19 pandemic on investigational centers. These impacts include governmental orders to restrict travel and practice social distancing, as well as governmental and institutional directives to devote critical healthcare resources to the COVID-19 pandemic. Since March 2020, at least five of our investigational sites have temporarily paused new patient randomization in the study, either voluntarily, out of an abundance of caution for patient and staff safety, or at the direction of local governments or institutions. The number of active sites has been dynamic and unpredictable, with a least one site reinitiating patient recruitment following a pause, while a previously active site has paused recruitment. The Company is in the process of identifying and screening additional investigational sites to either replace or supplement current sites. Investigators have not experienced any interruption in clinical trial supply of drug product for the study as a result of the COVID-19 pandemic. At this time, it is unclear if the temporary pausing of enrollment at certain investigational sites, or mitigations being implemented by our clinical management team to simplify enrollment and patient care, will materially impact the timeline for completing this study. However, we believe that the blinded interim readout will likely occur later than originally anticipated.
 
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 March 31, 2020 except that we adopted Accounting Standards Codification (ASC) Topic 842 Leases on October 1, 2019, as discussed in Note 2 to this quarterly report.
 
18
 
 
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 Six Months Ended March 31, 2020 and 2019
 
Our total revenues for the six months ended March 31, 2020 were $0.22 million, reflecting sale of product inventory obtained in the reverse acquisition completed in June 2019. There were no revenues for the six months ended March 31, 2019.
 
Total operating expenses increased by $1.89 million to $2.84 million for the six months ended March 31, 2020 compared to $0.95 million for the same period last year:
 
Our cost of sales and services was $0.01 million for the six months ended March 31, 2020, 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 $0.66 million to $1.03 million for the six months ended March 31, 2020 compared to $0.37 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 increased salary and related personnel expenses.
 
Our general and administrative expenses increased by $1.22 million to $1.80 million for the six months ended March 31, 2020 compared to $0.58 million for the same period last year. The increase was primarily due to increased salary and related personnel expenses, increased legal and professional fees, and public company expenses.
 
Total other income decreased by $0.01 million to $0.04 million for the six months ended March 31, 2020 compared to $0.05 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 six months ended March 31, 2020 was $2.58 million, or $0.32 per basic share, compared to a net loss of $0.89 million, or $0.28 per basic share, for the six months ended March 31, 2019.
 
Comparison of the Three Months Ended March 31, 2020 and 2019
 
Our total revenues for the three months ended March 31, 2020 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 March 31, 2019.
 
Total operating expenses increased by $1.09 million to $1.63 million for the three months ended March 31, 2020 compared to $0.54 million for the same period last year:
 
Our cost of sales and services was $0.01 million for the three months ended March 31, 2020, 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 $0.39 million to $0.50 million for the three months ended March 31, 2020 compared to $0.11 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 increased salary and related personnel expenses.
 
Our general and administrative expenses increased by $0.68 million to $1.11 million for the three months ended March 31, 2020 compared to $0.43 million for the same period last year. The increase was primarily due to increased salary and related personnel expenses, increased legal and professional fees, and public company expenses.
 
 
19
 
 
Total other income increased by $0.02 million to $0.03 million for the three months ended March 31, 2020 compared to $0.01 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 March 31, 2020 was $1.49 million, or $0.17 per basic share, compared to a net loss of $0.53 million, or $0.16 per basic share, for the three months ended March 31, 2019.
 
Capital Expenditures
 
Our capital expenditures primarily consist of purchases of computer and office equipment. There were no significant capital expenditures for the three months and six months ended March 31, 2020 and 2019.
 
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 six-month periods ended March 31, 2020 and 2019, we reported net losses of $2.58 million and $0.89 million, respectively.
 
At March 31, 2020, we had cash and cash equivalents of $6.99 million, working capital of $6.85 million, shareholders’ equity of $6.93 million and an accumulated deficit of $9.32 million. On January 8, 2020, we closed a registered direct offering of 1,354,691 common shares, no par value 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, resulting in net proceeds of approximately $3.89 million.
 
We plan to finance company operations over the course of the next twelve months with cash and cash equivalents 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, government grants, debt financings or other capital sources, including potential future licensing, collaboration or similar arrangements with third parties or other strategic transactions. If we determine it is advisable to raise additional funds, there is no assurance that adequate funding will be available to us or, if available, that such funding will be available on terms that we or our stockholders view as favorable. Market volatility and concerns over a global recession related to the COVID-19 pandemic may have a significant impact on the availability of funding sources and the terms at which any funding may be available.
 
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 $1.03 million and $0.37 million for the six months ended March 31, 2020 and 2019, respectively, and $0.50 million and $0.11 million for the three months ended March 31, 2020 and 2019, 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.
 
 
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Item 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.
 
Item 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 March 31, 2020. Our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures, as of March 31, 2020, 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 March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II — OTHER INFORMATION
 
Item 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.
 
Item 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 as supplemented by the additional risk factor in Item 8.01 in our Current Report on Form 8-K filed with the Securities and Exchange Commission on March 27, 2020.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
None.
  
Item 3. Defaults Upon Senior Securities.
 
None.
 
Item 4. Mine Safety Disclosures.
 
Not applicable.
 
Item 5. Other Information.
 
None.
 
 
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Item 6. Exhibits.
 
EXHIBIT INDEX
 
Exhibit
Number
 
Description
 
 
 
 
Amended and Restated Articles of Edesa Biotech, Inc. (included as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 23, 2020, and incorporated herein by reference).
 
 
 
 
Notice of Articles of Edesa Biotech, Inc.
 
 
 
 
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).
 
 
 
 
License Agreement by and between Edesa Biotech Research, Inc. and NovImmune SA dated April 17, 2020 (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 23, 2020, and incorporated herein by reference).
 
 
 
 
Purchase Agreement by and between Edesa Biotech Research, Inc. and NovImmune SA dated April 17, 2020 (included as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 23, 2020, and incorporated herein by reference).
 
 
 
 
Securities Purchase Agreement by and between Edesa Biotech, Inc. and NovImmune SA dated April 17, 2020 (included as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 23, 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.
 
 + Portions of this exhibit have been omitted pursuant to Rule 601(b)(10)(iv) of Regulation S-K.

 
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SIGNATURES
 
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: May 15, 2020
EDESA BIOTECH, INC.
 
 
 
/s/ Kathi Niffenegger
 
Kathi Niffenegger
 
Chief Financial Officer
 
(Principal Financial Officer and Duly Authorized Officer)
 
 
 
 
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