Edesa Biotech, Inc. 10-Q

Item 1. Financial Statements. Edesa Biotech, Inc. Condensed Interim Consolidated Balance Sheets June 30, 2021 September 30, 2020 Assets: Current assets: Cash and cash equivalents $ 8,052,574 $ 7,213,695 Accounts and other receivable 4,185,161 87,446 Prepaid expenses and other current assets 2,096,572 802,877 Total current assets 14,334,307 8,104,018 Non-current assets: Property and equipment, net 17,533 14,815 Intangible asset, net 2,407,657 2,483,536 Operating lease right-of-use assets 117,846 160,006 Total assets $ 16,877,343 $ 10,762,375 Liabilities, shareholders' equity and temporary equity: Current liabilities: Accounts payable and accrued liabilities $ 903,964 $ 1,460,127 Short-term operating lease liabilities 79,503 69,730 Total current liabilities 983,467 1,529,857 Non-current liabilities: Long-term payables 48,396 29,928 Long-term operating lease liabilities 41,725 94,460 Total liabilities 1,073,588 1,654,245 Commitments (Note 6) Temporary equity: Convertible preferred shares - 2,476,955 Shareholders' equity: Capital shares Authorized unlimited common and preferred shares without par value Issued and outstanding: 13,255,559 common shares (September 30, 2020 - 9,615,119 ) 34,627,125 18,500,853 Additional paid-in capital 4,006,347 1,550,480 Accumulated other comprehensive loss ( 20,129 ) ( 287,204 ) Accumulated deficit ( 22,809,588 ) ( 13,132,954 ) Total shareholders' equity 15,803,755 6,631,175 Total liabilities, shareholders' equity and temporary equity $ 16,877,343 $ 10,762,375 The accompanying notes are an integral part of these condensed interim consolidated financial statements. 3 Table of Contents Edesa Biotech, Inc. Condensed Interim Consolidated Statements of Operations Three Months Ended Nine Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Revenues: Product sales $ - $ 109,985 $ - $ 328,301 Expenses: Cost of sales - 1,472 - 15,287 Research and development 4,464,347 1,143,868 13,819,305 2,174,680 General and administrative 1,608,232 733,079 4,377,507 2,528,702 6,072,579 1,878,419 18,196,812 4,718,669 Loss from Operations ( 6,072,579 ) ( 1,768,434 ) ( 18,196,812 ) ( 4,390,368 ) Other Income (Loss): Reimbursement grant income 1,306,796 - 8,477,261 - Interest income 2,610 3,799 4,279 36,762 Foreign exchange gain (loss) 3,663 ( 692 ) 58,963 5,110 Loss on disposition of property and equipment - ( 436 ) - ( 436 ) 1,313,069 2,671 8,540,503 41,436 Loss before income taxes ( 4,759,510 ) ( 1,765,763 ) ( 9,656,309 ) ( 4,348,932 ) Income tax expense - - 800 800 Net Loss ( 4,759,510 ) ( 1,765,763 ) ( 9,657,109 ) ( 4,349,732 ) Exchange differences on translation 174,128 68,972 267,075 47,178 Net Comprehensive Loss $ ( 4,585,382 ) $ ( 1,696,791 ) $ ( 9,390,034 ) $ ( 4,302,554 ) Weighted average number of common shares 13,251,999 8,859,520 11,680,294 8,364,866 Loss per common share - basic and diluted $ ( 0.36 ) $ ( 0.20 ) $ ( 0.83 ) $ ( 0.52 ) The accompanying notes are an integral part of these condensed interim consolidated financial statements. 4 Table of Contents Edesa Biotech, Inc. Condensed Interim Consolidated Statements of Cash Flows Nine Months Ended June 30, 2021 June 30, 2020 Cash Flows from Operating Activities: Net loss $ ( 9,657,109 ) $ ( 4,349,732 ) Adjustments for: Depreciation and amortization 89,853 28,543 Loss on disposition of property and equipment - 436 Share-based compensation 2,290,794 511,966 Changes in working capital items: Accounts and other receivable ( 4,008,512 ) 156,361 Prepaid expenses and other current assets ( 1,389,083 ) ( 134,665 ) Accounts payable and accrued liabilities ( 635,554 ) 473,688 Net cash used in operating activities ( 13,309,611 ) ( 3,313,403 ) Cash Flows from Investing Activities: Proceeds on sales of property and equipment - 45,840 Purchase of property and equipment ( 7,610 ) ( 825 ) Purchase of intangible assets - ( 29,483 ) Purchase of short-term investments - ( 500,000 ) Proceeds from maturities of short-term investments - 500,000 Net cash provided by (used in) investing activities ( 7,610 ) 15,532 Cash Flows from Financing Activities: Proceeds from issuance of common shares and warrants 12,793,591 4,360,500 Proceeds from exercise of warrants 1,467,536 - Proceeds from exercise of share options 41,985 - Payments for issuance costs of common shares ( 349,408 ) ( 468,699 ) Payments for issuance costs of convertible preferred shares - ( 57,154 ) Proceeds from borrowings - 29,660 Net cash provided by financing activities 13,953,704 3,864,307 Effect of exchange rate changes on cash and cash equivalents 202,396 43,676 Net change in cash and cash equivalents 838,879 610,112 Cash and cash equivalents, beginning of period 7,213,695 5,030,583 Cash and cash equivalents, end of period $ 8,052,574 $ 5,640,695 Supplemental Disclosure of Noncash Financing Activities: Preferred shares converted from temporary equity to common shares $ 2,496,480 - Issuance costs withheld from gross proceeds from issuance of common shares 955,950 - Fair value of compensation warrants to underwriter 407,023 - 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. 5 Table of Contents Edesa Biotech, Inc. Condensed Interim Consolidated Statements of Changes in Shareholders' Equity Shares # Common Shares Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Shareholders' Equity Three Months Ended June 30, 2021 Balance - March 31, 2021 13,246,559 $ 34,602,637 $ 2,914,482 $ ( 194,257 ) $ ( 18,050,078 ) $ 19,272,784 Issuance of common shares upon exercise of share options 9,000 24,488 ( 8,585 ) - - 15,903 Share-based compensation - - 1,100,450 - - 1,100,450 Net loss and comprehensive loss - - - 174,128 ( 4,759,510 ) ( 4,585,382 ) Balance - June 30, 2021 13,255,559 $ 34,627,125 $ 4,006,347 $ ( 20,129 ) $ ( 22,809,588 ) $ 15,803,755 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 Nine Months Ended June 30, 2021 Balance - September 30, 2020 9,615,119 $ 18,500,853 $ 1,550,480 $ ( 287,204 ) $ ( 13,132,954 ) $ 6,631,175 Issuance of common shares in equity offerings 2,148,963 13,749,541 - - - 13,749,541 Issuance costs including fair value of underwriter warrants - ( 1,871,220 ) 407,023 - - ( 1,464,197 ) Issuance of common shares upon exercise of warrants 341,806 1,681,936 ( 214,400 ) - - 1,467,536 Issuance of common shares upon exercise of share options 19,746 69,535 ( 27,550 ) - - 41,985 Preferred return on convertible preferred shares - - - - ( 19,525 ) ( 19,525 ) Conversion of convertible preferred shares 1,129,925 2,496,480 - - - 2,496,480 Share-based compensation - - 2,290,794 - - 2,290,794 Net loss and comprehensive loss - - - 267,075 ( 9,657,109 ) ( 9,390,034 ) Balance - June 30, 2021 13,255,559 $ 34,627,125 $ 4,006,347 $ ( 20,129 ) $ ( 22,809,588 ) $ 15,803,755 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 and warrants in equity offering 1,354,691 3,070,358 1,290,142 - - 4,360,500 Issuance of common shares upon exercise of warrants 2,736 52,229 ( 52,229 ) - - - Preferred return on convertible preferred shares - - - - ( 15,205 ) ( 15,205 ) Issuance costs - ( 342,735 ) ( 125,964 ) - - ( 468,699 ) 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 The accompanying notes are an integral part of these condensed interim consolidated financial statements. 6 Table of Contents 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 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 of COVID-19 on 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 nine months ended June 30, 2021 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 assign value to underwriter warrants; 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. 7 Table of Contents 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: June 30, 2021 September 30, 2020 Computer equipment $ 43,339 $ 34,651 Furniture and equipment 6,138 5,694 49,477 40,345 Less: accumulated depreciation ( 31,944 ) ( 25,530 ) Total property and equipment, net $ 17,533 $ 14,815 Depreciation expense amounted to $ 2,481 and $ 1,992 for the three months ended June 30, 2021 and 2020, respectively, and $ 6,414 and $ 7,046 for the nine months ended June 30, 2021 and 2020, 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 the issuance of Series A-1 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 convertible preferred shares in temporary equity. 8 Table of Contents Edesa Biotech, Inc. Notes to Condensed Interim Consolidated Financial Statements (Unaudited) Intangible assets, net consisted of the following: June 30, 2021 September 30, 2020 The Constructs $ 2,529,483 $ 2,529,483 Less: accumulated amortization ( 121,826 ) ( 45,947 ) Total intangible assets, net $ 2,407,657 $ 2,483,536 Amortization expense amounted to $ 25,293 and $ 20,654 for the three months ended June 30, 2021 and 2020, respectively, and $ 75,879 and $ 20,654 for the nine months ended June 30, 2021 and 2020, respectively. Total estimated future amortization of intangible assets for each fiscal year is as follows: Year Ending September 30, 2021 $ 25,293 September 30, 2022 101,172 September 30, 2023 101,172 September 30, 2024 101,172 September 30, 2025 101,172 Thereafter 1,977,676 $ 2,407,657 5. Leases Related party operating lease The Company leases facilities used for executive offices from a company controlled by the Company's CEO 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 on the Balance Sheets were as follows: June 30, 2021 September 30, 2020 Assets: Operating lease right-of-use assets $ 117,846 $ 160,006 Liabilities: Current: Short-term operating lease liabilities $ 79,503 $ 69,730 Long-term: Long-term operating lease liabilities 41,725 94,460 Total lease liabilities $ 121,228 $ 164,190 The components of lease cost were as follows: Three Months Ended Nine Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Operating lease cost, included in general and administrative on the Statements of Operations $ 20,887 $ 18,508 $ 60,828 $ 57,079 9 Table of Contents Edesa Biotech, Inc. Notes to Condensed Interim Consolidated Financial Statements (Unaudited) Lease terms and discount rates were as follows: June 30, 2021 September 30, 2020 Remaining lease term (months): 18 27 Estimated incremental borrowing rate: 6.5 % 6.5 % The approximate future minimum lease payments under operating leases at June 30, 2021 were as follows: Year Ending September 30, 2021 $ 21,260 September 30, 2022 85,041 September 30, 2023 21,260 Total lease payment 127,561 Less imputed interest 6,333 Present value of lease liabilities 121,228 Less current installments 79,503 Long-term lease liabilities excluding current installments $ 41,725 Cash flow information was as follows: Nine Months Ended June 30, 2021 Nine Months Ended June 30, 2020 Cash paid for amounts included in the measurement of lease liabilities, included in accounts payable and accrued liabilities on the Statements of Cash Flows $ 60,830 $ 57,081 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 $ 55,068 and $ 164,915 for the three and nine months ended June 30, 2020, respectively. There was no rent under these leases during the three and nine months ended June 30, 2021. 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 June 30, 2021 are as follows: Year Ending September 30, 2021 $ 1,026,000 September 30, 2022 3,039,000 September 30, 2023 157,000 September 30, 2024 63,000 $ 4,285,000 10 Table of Contents Edesa Biotech, Inc. Notes to Condensed Interim Consolidated Financial Statements (Unaudited) License 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 4 for intangible asset. Under the license agreement, the Company recorded an expense of $ 3.5 million as a result of meeting a milestone during the nine months ended June 30, 2021 and is committed to remaining payments of up to an aggregate amount of $ 352.5 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 nine months ended June 30, 2021 and 2020. 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. A payment of $2.5 million was made for the drug substance during the nine months ended June 30, 2021 . The remaining purchase commitment is included in the table above for the year ending September 30, 2022. 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 nine months ended June 30, 2021 and 2020. In March 2021, through its Ontario subsidiary, the Company entered into a license agreement with the inventor of the same pharmaceutical product to acquire global rights for all fields of use beyond those named under the 2016 license agreement. For the nine months ended June 30, 2021, the Company recorded an expense of $ 106,000 as a result of meeting a milestone outlined in the 2021 license agreement. The Company is committed to remaining payments of up to an aggregate amount of $ 69.1 million, primarily relating to future potential commercial approval and sales milestones. In addition, if the Company fails to file an investigational new drug application or foreign equivalent (“IND”) for the product within a certain period of time following the date of the agreement, the Company is required to remit to the inventor a fixed license fee annually as long as the requirement to file an IND remains unfulfilled. Related party patent royalty commitments In August 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 in excess of $500,000 annually from legacy products using this invention. There were no royalty expenses during the three and nine months ended June 30, 2021 and 2020. 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 $ 4,552 and $ 3,461 during the three months ended June 30, 2021 and 2020, respectively and $ 19,181 and $ 7,996 during the nine months ended June 30, 2021 and 2020, respectively. 11 Table of Contents Edesa Biotech, Inc. Notes to Condensed Interim Consolidated Financial Statements (Unaudited) 7. Temporary Equity Series A-1 Convertible Preferred Shares As described in Notes 4 and 6, in April 2020, 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 had no par value, a stated value of $ 10,000 per share and ranked, 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. Subject to certain exceptions and adjustments for share splits, each Series A-1 Share was 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 . Because the convertible preferred shares were redeemable outside the control of the Company, they were presented as temporary equity rather than permanent shareholders’ equity until they were converted or redeemed. At June 30, 2021 all 250 Series A-1 Shares have been converted to common shares. 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 - 19,525 Conversion to common shares ( 250 ) ( 2,496,480 ) Balance June 30, 2021 - $ - 8. Capital Shares Equity Offerings On March 2, 2021, the Company closed an underwritten offering of 1,562,500 common shares, no par value, at a price to the public of $ 6.40 per share less underwriting discounts and commissions. Gross proceeds from the offering amounted to $ 10,000,000 . The Company granted to the underwriters a 30-day option to purchase up to an additional 234,375 common shares. The underwriters option expired subsequent to March 31, 2021 with no further shares issued. On the closing date the Company issued Underwriter Warrants to purchase an aggregate of up to 109,375 common shares at an exercise price of $ 8.00 per share, expiring on February 26, 2026 . The direct costs related to the issuance of the common shares were $ 1,145,010 . These direct costs were recorded as an offset against gross proceeds. The Company also recorded the fair value of underwriter warrants in the amount of $ 407,023 as share-based compensation to nonemployees under additional paid-in capital and an offset against gross proceeds. 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 . 12 Table of Contents Edesa Biotech, Inc. Notes to Condensed Interim Consolidated Financial Statements (Unaudited) 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 In September 2020, the Company entered into an Equity Distribution Agreement with RBC Capital Markets, LLC (“RBCCM”), as sales agent, pursuant to which the Company could 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. The agreement was terminated on February 25, 2021. During the nine months ended June 30, 2021, 586,463 shares were sold under the distribution agreement, resulting in $ 13,749,541 in gross proceeds. The commissions and direct costs of the offering program totaled $ 319,188 and were recorded as an offset against gross proceeds. 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, 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. 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 Issued 109,375 8.00 Exercised ( 341,806 ) 4.29 Balance June 30, 2021 760,290 $ 5.65 The following table summarizes information about the warrants outstanding at June 30, 2021: Number of Warrants (#) Exercise Prices Expiry Dates 28,124 $ 15.90 May 2023 603,529 $ 4.80 July 2023 7,484 $ 4.81 June 2024 11,778 $ 3.20 January 2025 109,375 $ 8.00 February 2025 760,290 13 Table of Contents Edesa Biotech, Inc. Notes to Condensed Interim Consolidated Financial Statements (Unaudited) The weighted average contractual life remaining on the outstanding warrants at June 30, 2021 is 27 months. The fair value of warrants issued during the nine months ended June 30, 2021 and 2020 was estimated using the Black-Scholes option valuation model using the following assumptions: Nine Months Ended June 30, 2021 Nine Months Ended June 30, 2020 Underwriter Warrants Class A Warrants Class B Warrants Placement Agent Warrants Risk free interest rate 0.67 % 1.61 % 1.55 % 1.61 % Expected life 5 years 3.5 years 0.83 years 5 years Expected share price volatility 94.20 % 103.81 % 134.15 % 101.89 % Expected dividend yield 0.00 % 0.00 % 0.00 % 0.00 % Share Options The Company adopted an Equity Incentive Compensation Plan in 2019 (the 2019 Plan) administered by the Board of Directors. 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 at June 30, 2021 was 2,625,951 , including shares available for the exercise of outstanding options. 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 and vesting 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 – 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 1,138,000 6.21 Exercised ( 19,746 ) 2.12 Forfeited ( 19,066 ) 6.07 Expired ( 1,906 ) 102.49 Balance – June 30, 2021 1,772,719 $ 5.07 The following table summarizes information about the options under the 2019 Plan outstanding and exercisable at June 30, 2021: Number of Options (#) Exercisable at June 30, 2021 (#) Range of Exercise Prices Expiry Dates 214 214 $ 638.40 Nov 2021 238 238 $ 304.08 Dec 2022 3,499 3,499 $ 35.28 - 93.24 Sep 2023 - Mar 2025 296,403 293,163 $ 2.16 Aug 2027 - Dec 2028 335,365 210,525 $ 3.16 Feb 2030 429,000 106,892 $ 7.44 - 8.07 Sep 2030 - Oct 2030 708,000 72,203 $ 5.25 - 5.65 Jan 2031 - April 2031 1,772,719 686,734 The weighted average contractual life remaining on the outstanding options at June 30, 2021 is 101 months. 14 Table of Contents Edesa Biotech, Inc. Notes to Condensed Interim Consolidated Financial Statements (Unaudited) During the nine months ended June 30, 2021, the independent directors of the Board of Directors granted a total of 105,000 options to new 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 monthly anniversary of the grant date following 90 days of employment, and an exercise price equal to the Nasdaq closing price on the grant dates. In October 2020 and April 2021, the independent directors of the Board of Directors granted a total of 430,000 and 603,000 options, respectively, to directors, officers and employees of the Company pursuant to the 2019 Plan. The options have a term of 10 years and an exercise price equal to the Nasdaq closing price on the grant dates. Options for directors have monthly vesting in equal proportions over 12 months beginning on the grant date and options for officers and current employees have monthly vesting in equal proportions over 36 months beginning on the grant date. The fair value of options granted during the nine months ended June 30, 2021 and 2020 was estimated using the Black-Scholes option valuation model using the following assumptions: Nine Months Ended June 30, 2021 Nine Months Ended June 30, 2020 Risk free interest rate 0.31 %- 0.90 % 1.45 % Expected life 5 years 5 years Expected share price volatility 94.00 %- 97.28 % 104.14 % Expected dividend yield 0.00 % 0.00 % The Company recorded $ 1,100,450 and $ 123,191 of share-based compensation expenses for the three months ended June 30, 2021 and 2020, respectively and $ 2,290,794 and $ 511,966 of share-based compensation expenses for the nine months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, the Company had approximately $ 2.74 million of unrecognized share-based compensation expense, which is expected to be recognized over a period of 36 months. Issued and outstanding common shares Number of Common Shares (#) Common Shares Balance September 30, 2019 7,504,468 $ 12,005,051 Common shares issued in equity offering 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 in equity offerings 2,148,963 13,749,541 Common shares issued upon exercise of warrants 341,806 1,681,936 Common shares issued upon exercise of share options 19,746 69,535 Common shares issued upon conversion of preferred shares 1,129,925 2,496,480 Share issuance costs - ( 1,871,220 ) Balance June 30, 2021 13,255,559 $ 34,627,125 9. Reimbursement Grant Income and Receivable Reimbursement grant income for the Company’s federal grant with the Canadian government’s Strategic Innovation Fund (SIF) is recorded based on the claim period. Claims during the nine months ended June 30, 2021 included reimbursement of eligible costs from the eligibility date in the SIF contribution agreement to June 30, 2021. At June 30, 2021, grant reimbursements receivable of $ 3,991,683 were included in accounts and other receivable. 15 Table of Contents Edesa Biotech, Inc. Notes to Condensed Interim Consolidated Financial Statements (Unaudited) 10. 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 and reimbursement grant receivable is not considered significant since amounts are due from the Canada Revenue Agency and Canadian Strategic Innovation Fund. (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 June 30, 2021, the Company’s Ontario subsidiary had assets of C$ 11.1 million and the U.S. dollar was equal to 1.2398 Canadian dollars. Based on the exposure at June 30, 2021, a 10% annual change in the Canadian/U.S. exchange rate would impact the Company’s loss and other comprehensive loss by approximately $0.89 million. (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. 16 Table of Contents Edesa Biotech, Inc. Notes to Condensed Interim Consolidated Financial Statements (Unaudited) 11. 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. 12. 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. 13. Related Party Transactions During the periods presented, the Company was party to the following related party transactions: · During the three months ended June 30, 2021 and 2020, the Company incurred rent expense of $ 20,887 and $ 18,508 , respectively, from a company controlled by the Company's CEO and $ 60,828 and $ 57,079 for the nine months ended June 30, 2021 and 2020, 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. · During the nine months ended June 30, 2020, accounts payable and accrued liabilities of $ 23,457 at September 30, 2019 was paid to a director for royalties on product sales by the California subsidiary during 2019. No royalty expenses were incurred since 2019. 14. Subsequent Events In July and August 2021, through its Ontario subsidiary, the Company entered into license agreements with a third party to obtain world-wide rights to intellectual property and manufacturing systems related to two of the Company’s product candidates. The license agreements require future milestone payments, sublicensing fees and royalties contingent upon certain future events. 17 Table of Contents