Edesa Biotech, Inc. - Quarter Report: 2020 June (Form 10-Q)

 

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 June 30, 2020

 

OR

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

 

For the transition period from                to

  

Commission File Number: 001-37619

 

EDESA BIOTECH, INC.

(Exact name of registrant as specified in its charter)

  

British Columbia, Canada	N/A
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
100 Spy Court
Markham, Ontario, Canada	L3R 5H6
(Address of principal executive offices)	(Zip Code)

 

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

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ☐    No  ☒

 

As of August 10, 2020 the registrant had 9,414,278 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 June 30, 2020

 

Table of Contents

 

PART I — FINANCIAL INFORMATION	3
Item 1. Financial Statements (Unaudited).	3
Condensed Interim Consolidated Balance Sheets – June 30, 2020 and September 30, 2019	3
Condensed Interim Consolidated Statements of Operations – Three and Nine Months Ended June 30, 2020 and 2019	4
Condensed Interim Consolidated Statements of Cash Flows – Nine Months Ended June 30, 2020 and 2019	5
Condensed Interim Consolidated Statements of Changes in Shareholders' Equity – Three and Nine Months Ended June 30, 2020 and 2019	6
Notes to Condensed Interim Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	21
Item 4. Controls and Procedures.	21
PART II — OTHER INFORMATION	22
Item 1. Legal Proceedings.	22
Item 1A. Risk Factors.	22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	22
Item 3. Defaults Upon Senior Securities.	22
Item 4. Mine Safety Disclosures.	22
Item 5. Other Information.	22
Item 6. Exhibits.	23

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Edesa Biotech, Inc.

Condensed Interim Consolidated Balance Sheets

(Unaudited)

 

	June 30, 2020	September 30, 2019
Assets:
Current assets:
Cash and cash equivalents	$5,640,695	$5,030,583
Accounts and other receivable	56,471	217,101
Prepaid expenses and deposits	523,641	397,022
Total current assets	6,220,807	5,644,706
Non-current assets:
Property and equipment, net	20,342	73,058
Intangible asset	2,508,829	-
Operating lease right-of-use assets	172,776	-
Total assets	$8,922,754	$5,717,764
Liabilities, shareholders' equity and temporary equity:
Current liabilities:
Accounts payable and accrued liabilities	$916,369	$461,634
Short-term operating lease liabilities	66,709	-
Total current liabilities	983,078	461,634
Non-current liabilities:
Long-term payables	29,320	-
Long-term operating lease liabilities	110,167	-
Total liabilities	1,122,565	461,634
Commitments (Note 7)
Temporary equity:
Convertible preferred shares	2,458,051	-
Shareholders' equity:
Capital shares
Authorized unlimited common and preferred shares without par value
Issued and outstanding:
8,861,895 common shares (2019 - 7,504,468)	14,784,903	12,005,051
Additional paid-in capital	1,951,683	327,768
Accumulated other comprehensive loss	(294,896)	(342,074)
Accumulated deficit	(11,099,552)	(6,734,615)
Total shareholders' equity	5,342,138	5,256,130
Total liabilities, shareholders' equity and temporary equity	$8,922,754	$5,717,764

 

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

 

 

Edesa Biotech, Inc.

Condensed Interim Consolidated Statements of Operations

(Unaudited) 

 

	Three Months Ended		Nine Months Ended
	June 30, 2020	June 30, 2019	June 30, 2020	June 30, 2019
Revenues:
Product sales and services	$109,985	$500	$328,301	$500
Expenses:
Cost of sales and services	1,472	-	15,287	-
Research and development	1,143,868	502,927	2,174,680	872,020
General and administrative	733,079	817,927	2,528,702	1,395,353
	1,878,419	1,320,854	4,718,669	2,267,373
Loss from Operations	(1,768,434)	(1,320,354)	(4,390,368)	(2,266,873)
Other Income (Loss):
Interest income	3,799	15,565	36,762	47,696
Foreign exchange gain (loss)	(692)	8,610	5,110	29,319
Gain (loss) on disposition of property and equipment	(436)	2,172	(436)	2,172
	2,671	26,347	41,436	79,187
Loss before income taxes	(1,765,763)	(1,294,007)	(4,348,932)	(2,187,686)
Income tax expense	-	-	800	-
Net Loss	(1,765,763)	(1,294,007)	(4,349,732)	(2,187,686)
Exchange differences on translation	68,972	27,443	47,178	118,456
Net Loss and Comprehensive Loss	$(1,696,791)	$(1,266,564)	$(4,302,554)	$(2,069,230)
Weighted average number of common shares	8,859,520	4,317,759	8,364,866	3,599,188
Loss per common share - basic and diluted	$(0.20)	$(0.30)	$(0.52)	$(0.61)

 

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

 

 

Edesa Biotech, Inc.

Condensed Interim Consolidated Statements of Cash Flows

(Unaudited) 

 

	Nine Months Ended
	June 30, 2020	June 30, 2019
Cash Flows From Operating Activities:
Net loss	$(4,349,732)	$(2,187,686)
Adjustments for:
Depreciation and amortization	28,543	2,511
(Gain) loss on disposition of property and equipment	436	(2,172)
Share-based compensation	511,966	36,300
Change in working capital items:
Accounts and other receivable	156,361	(113,962)
Prepaid expenses and deposits	(134,665)	(259,893)
Accounts payable and accrued liabilities	473,688	(1,376,057)
Net cash used in operating activities	(3,313,403)	(3,900,959)
Cash Flows From Investing Activities:
Cash acquired from reverse acquisition	-	6,389,322
Proceeds on sales of property and equipment	45,840	18,152
Purchase of property and equipment	(825)	(2,267)
Purchase of intangible assets	(29,483)	-
Purchase of short-term investments	(500,000)	-
Maturities of short-term investments	500,000	-
Net cash provided by investing activities	15,532	6,405,207
Cash Flows From Financing Activities:
Proceeds from issuance of common shares and warrants	4,360,500	-
Payments for issuance costs of common shares	(468,699)	-
Payments for issuance costs of convertible preferred shares	(57,154)	-
Proceeds from borrowings	29,660	-
Net cash provided by financing activities	3,864,307	-
Effect of exchange rate changes on cash and cash equivalents	43,676	128,618
Net change in cash and cash equivalents	610,112	2,632,866
Cash and cash equivalents, beginning of period	5,030,583	3,730,230
Cash and cash equivalents, end of period	$5,640,695	$6,363,096
Supplemental Disclosure of Non-cash Financing Activities:
Issuance of convertible preferred shares to acquire license	2,500,000	-
Fair value of placement agent warrants	18,051	-

 

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

 

 

 

Edesa Biotech, Inc.

Condensed Interim Consolidated Statements of Changes in Shareholders' Equity

(Unaudited)

 

	Shares #	Common Shares	Class A Preferred Shares	Additional Paid-in Capital	Accumulated Other Comprehensive Loss	Accumulated Deficit	Total Shareholders' Equity
Three Months Ended June 30, 2020:
Balance - March 31, 2020	8,859,159	$14,732,674	$-	$1,880,721	$(363,868)	$(9,318,584)	$6,930,943
Issuance of common shares upon exercise of warrants	2,736	52,229	-	(52,229)	-	-	-
Preferred return on convertible preferred shares	-	-	-	-	-	(15,205)	(15,205)
Share-based compensation	-	-	-	123,191	-	-	123,191
Net loss and comprehensive loss	-	-	-	-	68,972	(1,765,763)	(1,696,791)
Balance - June 30, 2020	8,861,895	$14,784,903	$-	$1,951,683	$(294,896)	$(11,099,552)	$5,342,138
Three Months Ended June 30, 2019:
Balance - March 31, 2019	3,239,902	$1,111,253	$6,176,993	$244,238	$(356,720)	$(4,403,405)	$2,772,359
Preferred return on Class A preferred shares	-	-	83,306	-	-	(83,306)	-
Effect of reverse acquisition	4,264,566	10,893,798	(6,260,299)	61,902	-	-	4,695,401
Share-based compensation	-	-	-	11,420	-	-	11,420
Net loss and comprehensive loss	-	-	-	-	27,443	(1,294,007)	(1,266,564)
Balance - June 30, 2019	7,504,468	$12,005,051	$-	$317,560	$(329,277)	$(5,780,718)	$6,212,616
Nine Months Ended June 30, 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 upon exercise of warrants	2,736	52,229	-	(52,229)	-	-	-
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)
Preferred return on convertible preferred shares	-	-	-	-	-	(15,205)	(15,205)
Share-based compensation	-	-	-	511,966	-	-	511,966
Net loss and comprehensive loss	-	-	-	-	47,178	(4,349,732)	(4,302,554)
Balance - June 30, 2020	8,861,895	$14,784,903	$-	$1,951,683	$(294,896)	$(11,099,552)	$5,342,138
Nine Months Ended June 30, 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 on Class A preferred shares	-	-	314,779	-	-	(314,779)	-
Effect of reverse acquisition	4,264,566	10,893,798	(6,260,299)	61,902	-	-	4,695,401
Share-based compensation	-	-	-	36,300	-	-	36,300
Net loss and comprehensive loss	-	-	-	-	118,456	(2,187,686)	(2,069,230)
Balance - June 30, 2019	7,504,468	$12,005,051	$-	$317,560	$(329,277)	$(5,780,718)	$6,212,616

 

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

 

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.

 

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 three and nine months ended June 30, 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 had 3 short-term operating leases upon adoption that did not follow the ROU model.

 

 

3. Short-term investments

 

The Company held short-term investments in U.S. Treasury Bills during the nine months ended June 30, 2020. No amounts were outstanding at June 30, 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: 

 

	June 30, 2020	September 30, 2019
Computer equipment	$38,194	$42,910
Furniture and equipment	5,578	7,932
	43,772	50,842
Less: accumulated depreciation	(29,000)	(29,194)
Depreciable assets, net	$14,772	$21,648
Assets not in service	5,570	51,410
Total property and equipment, net	$20,342	$73,058

 

Assets not in service represent equipment for sale held on consignment by a third party.

 

Depreciation expense amounted to $7,046 and $3,015 for the nine months ended June 30, 2020 and 2019, respectively, and $1,992 and $2,099 for the three months ended June 30, 2020 and 2019, respectively.

 

5. Intangible Asset

 

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 7 for license commitments.

 

6. 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	June 30, 2020
Assets:
Operating lease assets	Operating lease right-of-use assets	$172,776
Liabilities:
Current:
Operating lease liabilities	Short-term operating lease liabilities	$66,709
Long-term:
Operating lease liabilities	Long-term operating lease liabilities	110,167
Total lease liabilities		$176,876

 

The components of lease cost are as follows:

 

	Statements of Operations Caption	Three Months Ended June 30, 2020	Nine Months Ended June 30, 2020
Operating lease cost	General and administrative	$18,508	$57,079

 

Lease terms and discount rates are as follows:

 

	June 30, 2020
Remaining lease term (months):	30
Estimated incremental borrowing rate:	6.5%

 

The approximate future minimum lease payments under the operating leases at June 30, 2020 are as follows:

 

Year Ending
September 30, 2020	$18,809
September 30, 2021	76,770
September 30, 2022	77,282
September 30, 2023	19,320
Total lease payment	192,181
Less imputed interest	15,305
Present value of lease liabilities	176,876
Less current installments	66,709
Long-term lease liabilities excluding current installments	$110,167

 

 

Cash flow information is as follows:

 

	Statements of Cash Flows Caption	Nine Months Ended June 30, 2020
Cash paid for amounts included in the measurement of lease liabilities	Operating lease liabilities	$57,081

 

Other operating leases

 

 

7. 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 June 30, 2020 are as follows:

 

 

Year Ending
September 30, 2020	$2,902,250
September 30, 2021	6,282,750
September 30, 2022	2,570,000
September 30, 2023	26,000
September 30, 2024	23,000
	$11,804,000

 

License and royalty commitments

 

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 $363.5 million contingent upon meeting certain milestones outlined in the license agreement, primarily relating to future potential commercial approval and sales milestones. 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 and nine months ended June 30, 2020 and 2019.

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 and nine months ended June 30, 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 as of June 30, 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 nine months ended June 30, 2020 and 2019.

 

In 2016, through its Ontario subsidiary, the Company entered into a second exclusive license agreement with a 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 June 30, 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 nine months ended June 30, 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 $7,996 and $2,918 during the nine months ended June 30, 2020 and 2019, respectively, and $3,461 and $2,918 during the three months ended June 30, 2020 and 2019, respectively. There were no 401(k) contributions prior to the completion of the reverse acquisition on June 7, 2019.

 

Series A-1 Convertible Preferred Shares

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.

 

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 – December 31, 2018 and September 30, 2019	-	$-
Issuance of convertible preferred shares	250	$2,500,000
Convertible preferred shares issuance costs	-	(57,154)
Preferred return on convertible preferred shares	-	15,205
Balance – June 30, 2020	250	$2,458,051

 

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
Exercised	(13,098)	4.81
Balance – June 30, 2020	1,741,574	$4.66

 

The weighted average contractual life remaining on the outstanding warrants at June 30, 2020 is 24 months.

The fair value of warrants issued during the nine months ended June 30, 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 months ended June 30, 2020 or the three and nine months ended June 30, 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.

 

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	(333)	142.26
Balance – June 30, 2020	671,677	$3.17

 

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 June 30, 2020 is 102 months.

 

The following table summarizes information about the options under the Incentive Plan outstanding and exercisable at June 30, 2020: 

 

Number of Options (#)	Exercisable at June 30, 2020 (#)	Range of Exercise Prices	Expiry Dates
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
671,677	401,473

 

The fair value of options granted during the nine months ended June 30, 2020 and 2019 was estimated using the Black-Scholes option valuation model using the following assumptions: 

 

	Nine Months Ended
	June 30, 2020	June 30, 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 $511,966 and $36,300 of share-based compensation expenses for the nine months ended June 30, 2020 and 2019 respectively, and $123,191 and $11,420 for the three months ended June 30, 2020 and 2019, respectively.

 

As of June 30, 2020, the Company had approximately $360,000 of unrecognized share-based compensation expense, which is expected to be recognized over a period of 32 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
Common shares issued upon exercise of warrants	2,736	$52,229
Share issuance costs	-	(342,735)
Balance – June 30, 2020	8,861,895	$14,784,903