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 inflammatory and
immune-related diseases with clear unmet medical needs. The Company
is organized under the laws of British Columbia, Canada and is
headquartered in Markham, Ontario, Canada.
The
Company’s common shares trade on The Nasdaq Capital Market in
the United States under the symbol “EDSA”.
Impact of COVID-19
The
ongoing COVID-19 pandemic has severely impacted global economic
activity and has caused material disruptions to almost every
industry directly or indirectly. The full impact of the pandemic
remains uncertain and ongoing developments related to the pandemic
may cause material impacts to the Company’s future
operations, clinical study timelines and financial results. While
the full impact of the COVID-19 pandemic to business and operating
results presents additional uncertainty, the Company’s
management continues to use reasonably available information to
assess impacts to the Company’s business plans and financial
condition.
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 Report on Form 10-K for the year ended
September 30, 2020, which were filed with the Securities and
Exchange Commission (SEC) on December 7, 2020.
The
accompanying condensed interim consolidated financial statements
include the accounts of the Company and its wholly owned
subsidiaries, Edesa Biotech Research, Inc., an Ontario corporation,
and Edesa Biotech USA, Inc., a California corporation in the U.S.
All intercompany balances and transactions have been eliminated in
consolidation. All adjustments (consisting of normal recurring
adjustments and accruals) considered necessary for a fair
presentation of the results of operations for the periods presented
have been included in the interim periods. Operating results for
the three months ended December 31, 2020 are not necessarily
indicative of the results that may be expected for other interim
periods or the fiscal year ending September 30, 2021.
Use of estimates
The
preparation of the unaudited condensed interim consolidated
financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the unaudited
condensed interim consolidated financial statements and the
reported amounts of revenue and expenses during the period. Actual
results could differ from those estimates. Areas where significant
judgment is involved in making estimates are valuation of accounts
and other receivable; valuation and useful lives of property and
equipment; intangible assets; operating lease right-of-use assets;
deferred income taxes; classification of convertible preferred
shares as liability or equity; the determination of fair value of
share-based compensation; the determination of fair value of
warrants in order to allocate proceeds from equity issuances; and
forecasting future cash flows for assessing the going concern
assumption
Functional and reporting currencies
The
condensed interim consolidated financial statements of the Company
are presented in U.S. dollars, unless otherwise stated, which is
the Company’s and its wholly owned subsidiary’s, Edesa
Biotech USA, Inc., functional currency. The functional currency of
the Company’s wholly owned subsidiary, Edesa Biotech
Research, Inc., as determined by management, is Canadian
dollars.
Edesa Biotech, Inc.
Notes
to Condensed Interim Consolidated Financial Statements
(Unaudited)
Future accounting pronouncements
In June
2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments,
which includes provisions that require the measurement of an
estimate of all current expected credit losses for financial assets
held at the reporting date based on historical experience, current
conditions and reasonable and supportable forecasts. Financial
assets measured at amortized cost basis are to be presented at the
net amount expected to be collected and credit losses relating to
available-for-sale debt securities are to be recorded through an
allowance for credit losses. The guidance is effective for public
entities for fiscal years beginning after December 15, 2019,
including interim periods within those years, with early adoption
permitted for fiscal years beginning after December 15, 2018,
however the effective date is delayed by one year for smaller
reporting companies as defined by the SEC. These standards are
effective for the Company during the fiscal year ending September
30, 2022. Management expects that ASU 2016-13, as updated, will not
have a significant impact on the Company’s consolidated
financial statements.
3. Property
and equipment
Property
and equipment, net consisted of the following:
|
|
|
|
|
|
Computer
equipment
|
$36,376
|
$34,651
|
Furniture
and equipment
|
5,972
|
5,694
|
|
|
|
|
42,348
|
40,345
|
Less:
accumulated depreciation
|
(27,560)
|
(25,530)
|
|
|
|
Total
property and equipment, net
|
$14,788
|
$14,815
|
Depreciation
expense amounted to $1,619 and $2,403 for the three months ended
December 31, 2020 and 2019, respectively.
4. Intangible
Assets
Acquired License
In
April 2020, the Company entered into a license agreement with a
pharmaceutical development company to obtain exclusive world-wide
rights to know-how, patents and data relating to certain monoclonal
antibodies ("the Constructs"), including sublicensing rights.
Unless earlier terminated, the term of the license agreement will
remain in effect for 25 years from the date of first commercial
sale of licensed products containing the Constructs. Subsequently,
the license agreement will automatically renew for five-year
periods unless either party terminates the agreement in accordance
with its terms.
Under
the license agreement, the Company is exclusively responsible, at
its expense, for the research, development manufacture, marketing,
distribution and commercialization of the Constructs and licensed
products and to obtain all necessary licenses and rights. The
Company is required to use commercially reasonable efforts to
develop and commercialize the Constructs in accordance with the
terms of a development plan established by the
parties.
The
Company has determined that the license has multiple alternative
future uses in research and development projects and sublicensing
in other countries or for other disease indications. The value of
the acquired license is recorded as an intangible asset with
amortization over the estimated useful life of 25 years and
evaluation for impairment quarterly.
The
required upfront license payment of $2.5 million was paid by
issuance of Series A-1 Convertible Preferred Shares. See Note 8 for
convertible preferred shares. The value of the license includes
acquisition legal costs. The license agreement requires certain
development, approval and commercialization milestone payments
contingent on certain future events. The Company also has a
commitment to pay royalties based on any net sales of licensed
products and a percentage of any sublicensing revenue. See Note 6
for license commitments and Note 7 for temporary
equity.
Edesa Biotech, Inc.
Notes
to Condensed Interim Consolidated Financial Statements
(Unaudited)
Intangible
assets, net consisted of the following:
|
|
|
|
|
|
The
Constructs
|
$2,529,483
|
$2,529,483
|
|
|
|
Less:
accumulated amortization
|
(71,240)
|
(45,947)
|
|
|
|
Total
intangible assets, net
|
$2,458,243
|
$2,483,536
|
Amortization
expense amounted to $25,293 for the three months ended December 31,
2020. There was no amortization expense for three months ended
December 31, 2019.
Total estimated future amortization of intangible assets for each
fiscal year is as follows:
Year Ending
|
|
September
30, 2021
|
$75,879
|
September
30, 2022
|
101,172
|
September
30, 2023
|
101,172
|
September
30, 2024
|
101,172
|
September
30, 2025
|
101,172
|
Thereafter
|
1,977,676
|
|
|
|
$2,458,243
|
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
|
|
Assets:
|
|
|
Operating
lease assets
|
Operating
lease right-of-use assets
|
$150,413
|
|
|
Liabilities:
|
|
|
Current:
|
|
|
Operating
lease liabilities
|
Short-term
operating lease liabilities
|
$74,877
|
Long-term:
|
|
|
Operating
lease liabilities
|
Long-term
operating lease liabilities
|
79,923
|
|
|
Total
lease liabilities
|
|
$154,800
|
The
components of lease cost were as follows:
|
Statements
of Operations Caption
|
Quarter
Ended
December
31,
2020
|
Operating
lease cost
|
General
and administrative
|
$19,688
|
Edesa Biotech, Inc.
Notes
to Condensed Interim Consolidated Financial Statements
(Unaudited)
Lease
terms and discount rates were as follows:
|
|
Remaining
lease term (months):
|
24
|
Estimated
incremental borrowing rate:
|
6.5%
|
The
approximate future minimum lease payments under operating leases at
December 31, 2020 were as follows:
Year Ending
|
|
September
30, 2021
|
$62,081
|
September
30, 2022
|
82,732
|
September
30, 2023
|
20,683
|
|
|
Total
lease payment
|
165,464
|
Less
imputed interest
|
10,696
|
|
|
Present
value of lease liabilities
|
154,768
|
Less
current installments
|
74,877
|
|
|
Long-term
lease liabilities excluding current installments
|
$79,923
|
Cash
flow information was as follows:
|
Statements
of Cash Flows Caption
|
Quarter
Ended
December
31,
2020
|
Cash
paid for amounts included in the measurement of lease
liabilities
|
Accounts
payable and accrued liabilities
|
$19,689
|
The Company leased facilities through its California subsidiary
under two operating leases that expired in September 2020. Total
rent under these leases included in general and administrative
expenses was $0 and $68,508 for the three month ended December 31,
2020 and 2019, respectively. There was no rent under these leases
prior to the completion of the reverse acquisition on June 7,
2019.
6. Commitments
Research and other commitments
The
Company has commitments for contracted research organizations who
perform clinical trials for the Company’s ongoing clinical
studies, other service providers and the drug substance acquired in
connection with a license agreement. Aggregate future contractual
payments at December 31, 2020 are as follows:
Year Ending
|
|
September
30, 2021
|
$4,128,000
|
September
30, 2022
|
2,574,000
|
September
30, 2023
|
28,000
|
September
30, 2024
|
25,000
|
|
|
|
$6,755,000
|
In
April 2020, through its Ontario subsidiary, the Company entered
into a license agreement with a third party to obtain exclusive
world-wide rights to certain know-how, patents and data relating to
certain monoclonal antibodies ("the Constructs"), including
sublicensing rights. An intangible asset for the acquired license
has been recognized. See Note 5 for intangible asset. Under the
license agreement, the Company is committed to payments of up to an
aggregate amount of $356 million contingent upon meeting certain
milestones outlined in the license agreement, primarily relating to
future potential commercial approval and sales milestones.
Effective December 31, 2020, the parties mutually agreed to change
the timing of the first milestone event to February 28, 2021. The
Company also has a commitment to pay royalties based on any net
sales of the products in the countries where the Company directly
commercializes the products containing the Constructs and a
percentage of any sublicensing revenue received by the Company and
its affiliates in the countries where it does not directly
commercialize the products containing the Constructs. No royalty or
sublicensing payments were made to the third party during the three
months ended December 31, 2020.
Edesa Biotech, Inc.
Notes
to Condensed Interim Consolidated Financial Statements
(Unaudited)
In
connection with this license agreement and pursuant to a purchase
agreement entered into in April 2020, the Company acquired drug
substance of one of the Constructs for an aggregate purchase price
of $5.0 million, payable in two future installments, the first when
the Company is ready to initiate a Phase 2 trial and the second
when the Company is ready to initiate a Phase 3 trial. The purchase
commitment is included in the table above in 2021 and 2022. No
amounts have been paid for the drug substance during the three
months ended December 31, 2020.
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. 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, 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. There were no royalty expenses during the three
months ended December 31, 2020 and 2019.
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 $4,640 and $1,556 during the
three months ended December 31, 2020 and 2019
respectively.
7. Temporary
Equity
Series A-1 Convertible Preferred Shares
As
described in Notes 4 and 6, in April 2020, the Company entered into
a license agreement with a pharmaceutical development company to
obtain exclusive world-wide rights to know-how, patents and data
relating to certain monoclonal antibodies ("the Constructs"),
including sublicensing rights. In exchange for the exclusive rights
to develop and commercialize the Constructs, the Company issued 250
convertible preferred shares valued at $2.5 million designated as
Series A-1 Convertible Preferred Shares (the “Series A-1
Shares). The Series A-1 Shares have no par value, a stated value of
$10,000 per share and rank, with respect to redemption payments,
rights upon liquidation, dissolution or winding-up of the Company,
or otherwise, senior in preference and priority to the
Company’s common shares.
Edesa Biotech, Inc.
Notes
to Condensed Interim Consolidated Financial Statements
(Unaudited)
A
holder of Series A-1 Shares is not entitled to receive dividends
unless declared by the Company’s Board of Directors. Subject
to certain exceptions and adjustments for share splits, each Series
A-1 Share is convertible six months after its date of issuance into
a number of the Company’s common shares calculated by
dividing (i) the sum of the stated value of such Series A-1 Share
plus a return equal to 3% of the stated value of such Series A-1
Share per annum (collectively, the “Preferred Amount”)
by (ii) a fixed conversion price of $2.26. A holder of Series A-1
Shares will not have the right to convert any portion of its Series
A-1 Shares if the holder, together with its affiliates, would
beneficially own in excess of 4.99% of the number of common shares
outstanding immediately after giving effect to such conversion (the
“Beneficial Ownership Limitation”); provided, however,
that upon notice to the Company, the holder may increase the
Beneficial Ownership Limitation to a maximum of 9.99%. The Series
A-1 Shares do not have the right to vote on any matters except as
required by law and do not contain any variable pricing features,
or any price-based anti-dilutive features.
In the
event of any liquidation, dissolution or winding-up of the Company,
a holder of Series A-1 Shares shall be entitled to receive, before
any distribution or payment may be made with respect to the
Company’s common shares, an amount in cash equal to the
Preferred Amount per share, plus any unpaid accrued dividends on
all such shares.
At any
time, the Company may redeem some or all outstanding Series A-1
Shares for a cash payment per share equal to the Preferred Amount.
A holder of Series A-1 Shares may require the Company to redeem the
Series A-1 Shares for cash beginning 18 months after issuance if at
any time after such date the 30-day volume weighted average price
of the Company’s common shares is below the conversion price
of $2.26. In the event of a required redemption, at the election of
the Company, the redemption amount (which is equal to the Preferred
Amount) may be paid in full or in up to twelve equal monthly
payments with any unpaid redemption amounts accruing interest at a
rate of 3% annually, compounded monthly. On the third anniversary
of the date of issuance of the Series A-1 Shares, the Company has
the right to convert any outstanding Series A-1 Shares into common
shares.
Because
the convertible preferred shares are redeemable outside the control
of the Company, they are presented as temporary equity rather than
permanent shareholders’ equity.
Issued and outstanding Series A-1 Convertible Preferred
Shares:
|
Series
A-1 Convertible Preferred Shares (#)
|
Series
A-1 Convertible Preferred Shares
|
Balance
– September 30, 2019
|
-
|
$-
|
|
|
|
Issuance
of convertible preferred shares
|
250
|
$2,500,000
|
Convertible
preferred share issuance costs
|
-
|
(57,154)
|
Preferred
return on convertible preferred shares
|
-
|
34,109
|
|
|
|
Balance
– September 30, 2020
|
250
|
$2,476,955
|
|
|
|
Preferred
return on convertible preferred shares
|
-
|
13,611
|
Preferred
Shares converted
|
(110)
|
(1,118,353)
|
|
|
|
Balance
–December 31, 2020
|
140
|
$1,372,213
|
Edesa Biotech, Inc.
Notes
to Condensed Interim Consolidated Financial Statements
(Unaudited)
8. Capital
shares
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 were 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 were exercisable on or
after July 8, 2020, at an exercise price of $4.00 per share and
expired 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 were 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.
Equity Distribution
Agreement
On
September 28, 2020, the Company entered into an Equity Distribution
Agreement with RBC Capital Markets, LLC (“RBCCM”), as
sales agent, pursuant to which the Company may offer and sell, from
time to time, common shares through an at-the-market equity
offering program for up to $9.2 million in gross cash proceeds.
RBCCM will use commercially reasonable efforts to sell the common
shares from time to time, based upon the Company’s
instructions. The Company has no obligation to sell any of the
shares and may at any time suspend sales under the distribution
agreement or terminate the agreement in accordance with its terms.
The total amount of cash that may be generated under this
distribution agreement is uncertain and depends on a variety of
factors, including market conditions and the trading price of the
Company’s common shares. During the three months ended
December 31, 2020, 169,753 shares were sold under the distribution
agreement, resulting in $1,026,528 in gross proceeds and $35,928 in
commissions.
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. The Company
adopted interest-free rates by reference to the U.S. treasury yield
rates. The Company calculated the fair value of share options
granted based on the expected life of 5 years (2019: 4 years),
considering expected forfeitures during the option term of 10
years. Expected life of warrants is based on warrant terms. The
Company did not and is not expected to declare any dividends.
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.
Edesa Biotech, Inc.
Notes
to Condensed Interim Consolidated Financial Statements
(Unaudited)
Warrants
A
summary of the Company’s warrants activity is as
follows:
|
Number of Warrant
Shares (#)
|
Weighted Average
Exercise Price
|
Balance
– September 30, 2019
|
48,914
|
$11.19
|
|
|
|
Issued
|
1,705,758
|
$4.47
|
Exercised
|
(761,951)
|
4.31
|
|
|
|
Balance
– September 30, 2020
|
992,721
|
$4.92
|
|
|
|
Exercised
|
(243,369)
|
$4.09
|
|
|
|
Balance
– December 31, 2020
|
749,352
|
$5.19
|
The
following table summarizes information about the warrants
outstanding at December 31, 2020:
|
|
Expiry
Dates
|
28,124
|
$15.90
|
May
2023
|
701,966
|
$4.80
|
July
2023
|
7,484
|
$4.81
|
June
2024
|
11,778
|
$3.20
|
January
2025
|
749,352
|
|
|
There
were no warrants issued during the three months ended December 31,
2020 and 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 1,148,697, 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.
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:
|
|
Weighted Average
Exercise Price
|
Balance
– September 30, 2019
|
319,645
|
$3.39
|
|
|
|
Granted
|
366,365
|
3.35
|
Exercised
|
(4,450)
|
2.60
|
Forfeited
|
(5,790)
|
2.73
|
Expired
|
(333)
|
145.20
|
|
|
|
Balance
– September 30, 2020
|
675,437
|
$3.30
|
|
|
|
Granted
|
430,000
|
7.44
|
Expired
|
(238)
|
-
|
|
|
|
Balance
– December 31, 2020
|
1,105,199
|
$4.77
|
Edesa Biotech, Inc.
Notes
to Condensed Interim Consolidated Financial Statements
(Unaudited)
On
October 13, 2020, the independent directors of the Board of
Directors granted a total of 430,000 options to directors, officers
and employees of the Company pursuant to the 2019 Plan. The options
have a term of 10 years with monthly vesting in equal proportions
over 36 months beginning on the grant date 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 December 31, 2020 is 104 months.
The
following table summarizes information about the options under the
Incentive Plan outstanding and exercisable at December 31,
2020:
|
Exercisable
at
December 31, 2020
(#)
|
|
Expiry
Dates
|
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
|
311,883
|
304,323
|
C$2.16
|
Aug 2027-Dec
2028
|
345,365
|
178,239
|
$3.16
|
Feb
2030
|
14,000
|
776
|
$8.07
|
Sep
2030
|
430,000
|
35,847
|
$7.44
|
Oct
2030
|
1,105,199
|
523,136
|
|
|
The
fair value of options granted during the three months ended
December 31, 2020 was estimated using the Black-Scholes option
valuation model using the following assumptions:
|
|
|
|
|
|
Risk free interest
rate
|
0.31%
|
Expected
life
|
5
years
|
Expected share
price volatility
|
97.28%
|
Expected dividend
yield
|
0.00%
|
There
were no options granted during the three months ended December
31,2019.
The
Company recorded $722,909 and $8,755 of share-based compensation
expenses for the three months ended December 31, 2020 and 2019,
respectively.
As of
December 31, 2020, the Company had approximately $1,944,000 of
unrecognized share-based compensation expense, which is expected to
be recognized over a period of 34 months.
Issued and outstanding common shares:
|
Number
of Common Shares (#)
|
|
Balance
– September 30, 2019
|
7,504,468
|
$12,005,051
|
|
|
|
Common
shares issued
|
1,354,691
|
$3,070,358
|
Common
shares issued upon exercise of warrants
|
751,510
|
3,754,265
|
Common
shares issued upon exercise of share options
|
4,450
|
20,935
|
Share
issuance costs
|
-
|
(349,756)
|
|
|
|
Balance
– September 30, 2020
|
9,615,119
|
$18,500,853
|
|
|
|
Common
shares issued
|
169,753
|
$1,026,528
|
Common
shares issued upon exercise of warrants
|
243,369
|
1,111,708
|
Common
shared issued upon conversion of preferred shares
|
494,846
|
1,118,353
|
Share
issuance costs
|
-
|
(60,983)
|
|
|
|
Balance
– December 31, 2020
|
10,523,087
|
$21,696,459
|
Edesa Biotech, Inc.
Notes
to Condensed Interim Consolidated Financial Statements
(Unaudited)
9. 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.
(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, U.S. Treasury Bills and money market mutual funds of
U.S. government securities. 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.
(c) Foreign
exchange risk
The
Company’s subsidiary has 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, 2020, the Company’s
Ontario subsidiary had assets of C$3 million and the U.S. dollar
was equal to 1.2744 Canadian dollars. Based on the exposure at
December 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 $235,000.
(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.
Edesa Biotech, Inc.
Notes
to Condensed Interim Consolidated Financial Statements
(Unaudited)
10. 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.
11. 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.
12. Related
party transactions
During
the periods presented, the Company incurred the following related
party transactions:
●
During the three
months ended December 31, 2020 and 2019, the Company incurred rent
expense of $19,688 and $19,440 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, 2020 and
2019. 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.
13. Subsequent
events
Subsequent to
December 31, 2020 and through February 12, 2021, the Company
received $3.13 million as follows: 416,710 common shares were
issued under the equity distribution agreement with RBCCM with
gross proceeds of approximately $2.72 million and commissions of
approximately $0.10 million; 98,437 common shares were issued upon
exercise of Class A warrants with proceeds of approximately $0.47
million; and 10,746 common shares were issued upon exercise of
share options with proceeds of approximately $0.03
million.
On
February 2, 2021, the Company, through its wholly owned Ontario
subsidiary, entered into a multi-year contribution agreement with
the Canadian government’s Strategic Innovation Fund. Under
this agreement, the Government of Canada committed up to C$14.05
million ($11 million) in nonrepayable funding toward 75% of our
eligible reimbursable expenses for (i) the Phase 2 portion of the
ongoing Phase 2/3 study of the investigation therapy EB05 in
hospitalized COVID-19 patients, and (ii) certain pre-clinical
research intended to potentially broaden the application of our
experimental therapy.