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Item 2. Management’s Discussion and Analysis

2022-02-14 compared with 2021-08-13 · 44 added, 71 removed, 40 unchanged (74% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following management’s discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed interim consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q as of June 30, 2021 and our audited consolidated financial statements for the year ended September 30, 2020 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on December 7, 2020.

The following management’s discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed interim consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q as of December 31, 2021 and our audited consolidated financial statements for the year ended September 30, 2021 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on December 28, 2021.

This Quarterly Report on Form 10-Q contains forward-looking statements.

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We do not intend to update any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law.

The discussion and analysis of our financial condition and results of operations are based on our unaudited condensed interim consolidated financial statements as of June 30, 2021 and September 30, 2020, and for the three and nine months ended June 30, 2021 and 2020 included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which we have prepared in accordance with U.S.

The discussion and analysis of our financial condition and results of operations are based on our unaudited condensed interim consolidated financial statements as of December 31, 2021 and September 30, 2021, and for the three months ended December 31, 2021 and 2020 included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which we have prepared in accordance with U.S.

generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q.

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Since EB05 has demonstrated the ability to block signaling irrespective of the presence or concentration of the various molecules that frequently bind with TLR4, we believe that EB05 could ameliorate TLR4-mediated inflammation cascades in ARDS patients, thereby reducing lung injury, ventilation rates and mortality.

An international Phase 2/Phase 3 clinical study of EB05 is currently ongoing.

In September 2021, an independent data and safety monitoring board pre-emptively unblinded the Phase 2 part of a Phase 2/3 study of EB05 in hospitalized COVID-19 patients and identified "a clinically important" mortality benefit.

The monitoring board further recommended continuation of the study into a Phase 3 confirmatory trial.

The Phase 2 part of the study was funded primarily by a $11 million (C$14 million) reimbursement grant that was awarded by the Canadian government’s Strategic Innovation Fund (SIF) following a multi-disciplinary technical review of our drug technology and plans.

In addition to EB05, we are developing an sPLA2 inhibitor, designated as EB01, as a topical treatment for chronic allergic contact dermatitis (ACD), a common, potentially debilitating condition and occupational illness.

EB01 employs a novel, non-steroidal mechanism of action and in two clinical studies has demonstrated statistically significant improvement of multiple symptoms in ACD patients.

A Phase 2B clinical study evaluating EB01 for chronic ACD is currently ongoing in the United States and Canada.

EB01 is currently being evaluated in a Phase 2b clinical study.

In addition to our current clinical programs, we intend to expand the utility of our technologies and clinical-stage assets across other indications.

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EB05 Clinical Study in Hospitalized COVID-19 Patients

In June 2021, a Data and Safety Monitoring Board (DSMB), composed of independent subject matter experts, conducted a pre-planned interim review of the first patient cohort participating in our EB05 clinical study.

The DSMB assessed blinded comparative treatment data for safety and futility and, after completing their analysis, recommended that enrollment in the trial continue.

The DSMB's recommendation is consistent with our expectation and the previous safety and tolerability profile of EB05.

We plan to complete the end of Phase 2 (interim) analysis as early as third calendar quarter 2021.

We recently filed a trial amendment with the U.S.

Food and Drug Administration to align the U.S.

study protocol with other jurisdictions.

Based on results from the upcoming interim analysis, we also plan to adjust the study’s current patient segmentation and associated endpoints.

Enrollment is ongoing.

EB01 Clinical Study in Allergic Contact Dermatitis Patients

In June 2021, an independent DSMB completed an interim review of blinded data from the first cohort of our Phase 2b study of EB01 and determined that our drug candidate met key interim study parameters.

The DSMB assessed the blinded comparable data for safety as well as pre-assigned statistical thresholds used to determine the number of subjects for the final part of the Phase 2b study.

The initial cohort analyzed consisted of a population of 46 subjects, of whom 36 completed the study follow-up and were used in the interim analysis.

Based on the interim findings and the safety monitoring board's recommendations, we plan to enroll an additional cohort of at least 120 evaluable subjects, who will be provided with either EB01 topical treatment (at a 2.0%, 1.0% or 0.2% concentration) or a placebo cream.

During the quarter, we added new investigational sites and expanded recruitment beyond the U.S.

We have also added a voluntary open-label extension for patients once they complete their treatment in the main study.

Reimbursement Grant

On February 2, 2021, our wholly owned subsidiary Edesa Biotech Research, Inc.

entered into a multi-year contribution agreement with the Canadian government’s Strategic Innovation Fund, or SIF (the “Agreement”).

Under this Agreement, the Government of Canada committed up to C$14.05 million ($11 million) in nonrepayable funding toward (i) the Phase 2 portion of our ongoing Phase 2/3 study of our investigation therapy EB05 in hospitalized COVID-19 patients, and (ii) certain pre-clinical research intended to potentially broaden the application of our experimental therapy (collectively, the “Project”).

Pursuant to the contribution agreement, Edesa will conduct work, incur expenses and fund all costs from our own cash resources.

On a quarterly basis, we may submit claims to the SIF for 75% of eligible reimbursable expenses.

Under the Agreement, Edesa has agreed to certain obligations in relation to the completion of the Project.

In the event that we breach our obligations under the Agreement, subject to applicable cure, the SIF may exercise a number of remedies, including suspending or terminating funding under the Agreement, demanding repayment of funding previously received and/or terminating the Agreement.

The performance obligations of Edesa Biotech Research under the contribution agreement are guaranteed by the Company.

Significant Accounting Policies and Estimates

Edesa’s significant accounting policies are described in Note 3 to our audited consolidated financial statements for the year ended September 30, 2020 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on December 7, 2020.

There are no significant changes in those policies for the quarter ended June 30, 2021.

During the quarter, Health Canada authorized the study design of the Phase 3 part of our Phase 2/3 study evaluating EB05 in hospitalized COVID-19 patients.

Under the amended study protocol, we plan to assess the efficacy and safety of EB05 among critically ill COVID-19 patients receiving extracorporeal membrane oxygenation (ECMO) and/or invasive mechanical ventilation plus organ support (IMV+), defined as Level 7 on the World Health Organization's COVID-19 Severity Scale.

The amended trial protocol design calls for approximately 315 evaluable subjects.

We have filed similar protocol amendments with the U.S.

Food and Drug Administration (FDA) as well as other jurisdictions.

In the U.S., the company is currently in discussions with the FDA on the design of the final Phase 3 protocol.

Results of Operations

Comparison of the Three Months Ended June 30, 2021 and 2020

There were no revenues for the three months ended June 30, 2021 compared to $0.11 million for the three months ended June 30, 2020, reflecting the winddown and discontinuation of sales of product inventory from legacy operations.

Total operating expenses increased by $4.19 million to $6.07 million for the three months ended June 30, 2021 compared to $1.88 million for the same period last year:

There was no cost of sales for the three months ended June 30, 2021 compared to less than $0.01 million for the three months ended June 30, 2020, reflecting the winddown and discontinuation of sales of product inventory from legacy operations.

Research and development expenses increased by $3.32 million to $4.46 million for the three months ended June 30, 2021 compared to $1.14 million for the same period last year primarily due to increased external research expenses related to recruitment and enrollment in our ongoing clinical studies, increased investigational drug product expenses and an increase in noncash share-based compensation.

Higher salary and related personnel expenses and patent fees also contributed to the increase.

General and administrative expenses increased by $0.88 million to $1.61 million for the three months ended June 30, 2021 compared to $0.73 million for the same period last year primarily as a result of higher salary and related personnel expenses, noncash share-based compensation and increased headcount.

Higher legal and other professional services also contributed to the increase.

Total other income increased by $1.31 million to $1.31 million for the three months ended June 30, 2021 compared to less than $0.01 million for the same period last year primarily due to increased grant income under our federal reimbursement grant with the Canadian government’s Strategic Innovation Fund.

For the three months ended June 30, 2021, Edesa reported a net loss of $4.76 million, or $0.36 per common share, compared to a net loss of $1.77 million, or $0.20 per common share, for the three months ended June 30, 2020.

Comparison of the Nine Months Ended June 30, 2021 and 2020

There were no revenues for the nine months ended June 30, 2021 compared to $0.33 million for the nine months ended June 30, 2020, reflecting the winddown and discontinuation of sales of product inventory from legacy operations.

Total operating expenses increased by $13.48 million to $18.20 million for the nine months ended June 30, 2021 compared to $4.72 million for the same period last year:

There was no cost of sales for the nine months ended June 30, 2021 compared to $0.02 million for the nine months ended June 30, 2020, reflecting the winddown and discontinuation of sales of product inventory from legacy operations.

Research and development expenses increased by $11.65 million to $13.82 million for the nine months ended June 30, 2021 compared to $2.17 million for the same period last year primarily due to milestone payments related to advancement of our EB05 clinical program, increased external research expenses related to accelerated activity in our ongoing clinical studies, increased investigational drug product expenses and an increase in noncash share-based compensation.

Higher salary and related personnel expenses and patent fees also contributed to the increase.

General and administrative expenses increased by $1.85 million to $4.38 million for the nine months ended June 30, 2021 compared to $2.53 million for the same period last year primarily as a result of higher salary and related personnel expenses, noncash share-based compensation and increased headcount.

Higher legal and other professional services also contributed to the increase.

Total other income increased by $8.50 million to $8.54 million for the nine months ended June 30, 2021 compared to $0.04 million for the same period last year primarily due to increased grant income under our federal reimbursement grant with the Canadian government’s Strategic Innovation Fund.

For the nine months ended June 30, 2021, Edesa reported a net loss of $9.66 million, or $0.83 per common share, compared to a net loss of $4.35 million, or $0.52 per common share, for the nine months ended June 30, 2020.

Comparison of the Three Months Ended December 31, 2021 and 2020

Total operating expenses increased by $2.55 million to $5.16 million for the three months ended December 31, 2021 compared to $2.61 million for the same period last year:

Research and development expenses increased by $2.57 million to $3.95 million for the three months ended December 31, 2021 compared to $1.38 million for the same period last year primarily due to increased external research expenses related to our ongoing clinical studies, increased investigational drug product expenses, higher salary and related personnel expenses due to increased headcount and higher patent fees, which were partially offset by a decrease in noncash share-based compensation.

General and administrative expenses decreased by $0.02 million to $1.21 million for the three months ended December 31, 2021 compared to $1.23 million for the same period last year primarily as a result of decreased noncash share-based compensation, which was partially offset by higher insurance, and legal and other professional service fees.

Total other income (loss) increased by $0.80 million to an overall gain of $0.78 million for the three months ended December 31, 2021 compared to an overall loss of $0.02 million for the same period last year primarily due to increased grant income under our federal reimbursement grant with the Canadian government’s Strategic Innovation Fund.

For the three months ended December 31, 2021, our net loss was $4.38 million, or $0.33 per common share, compared to a net loss of $2.64 million, or $0.26 per common share, for the three months ended December 31, 2020.

Capital Expenditures

Our capital expenditures primarily consist of purchases of computer and office equipment.

There were no significant capital expenditures for the nine months ended June 30, 2021 and 2020.

Our capital expenditures primarily consist of computer and office equipment.

There were no significant capital expenditures for the three months ended December 31, 2021 and 2020.

Liquidity and Capital Resources

As a clinical-stage company we have not generated significant revenue, and we expect to incur operating losses as we continue our efforts to acquire, develop, seek regulatory approval for and commercialize product candidates and execute on our strategic initiatives.

Our operations have historically been funded through issuances of common shares, convertible preferred shares, convertible loans, exercises of common share purchase warrants, government grants and tax incentives.

For the nine-month periods ended June 30, 2021 and 2020, we reported net losses of $9.66 million and $4.35 million, respectively.

Under our contribution agreement with the Canadian government’s Strategic Innovation Fund, we are eligible to receive cash reimbursements up to C$14.05 million ($11 million USD) in the aggregate for certain research and development expenses related to our EB05 clinical development program.

During the nine-month period ended June 30, 2021, we recorded $8.48 million in grant income.

On March 2, 2021, we completed a registered public offering of an aggregate of 1,562,500 common shares, no par value, of the Company at an offering prices of $6.40 per share for net proceeds of $8.85 million, after deducting underwriter fees and related offering expenses.

For the nine months ended June 30, 2021, the exercise of warrants and options as well as sales under our equity distribution agreement with RBC Capital Markets, LLC resulted in the issuance of 948,015 common shares and net cash proceeds to the Company of $4.97 million.

At June 30, 2021, we had cash and cash equivalents of $8.05 million, working capital of $13.35 million, shareholders’ equity of $15.80 million and an accumulated deficit of $22.81 million.

We plan to finance company operations over the course of the next twelve months with cash and cash equivalents on hand and reimbursements of eligible research and development expenses under our agreement with the Canadian government’s SIF.

Management has flexibility to adjust this timeline by a making changes to planned expenditures related to, among other factors, the size and timing of clinical trial expenditures, staffing levels, and the acquisition or in-licensing of new product candidates.

To help fund our operations and meet our obligations, we may also seek additional financing through the sale of equity, government grants, debt financings or other capital sources, including potential future licensing, collaboration or similar arrangements with third parties or other strategic transactions.

Our operations have historically been funded through issuances of common shares, exercises of common share purchase warrants, convertible preferred shares, convertible loans, government grants and tax incentives.

For the three-month periods ended December 31, 2021 and 2020, we reported net losses of $4.38 million and $2.64 million, respectively.

Under our contribution agreement with the Canadian government’s Strategic Innovation Fund (SIF), we are eligible to receive cash reimbursements up to C$14.05 million (approximately $11 million USD) in the aggregate for certain research and development expenses related to our EB05 clinical development program.

For the year ended September 30, 2021, we recorded $10.34 million in grant income, and for the three months ended December 31, 2021, we recorded $0.78 million in grant income.

On November 22, 2021, we entered into an equity distribution agreement with RBC Capital Markets, LLC (RBCCM), as sales agent, pursuant to which we may offer and sell, from time to time, common shares through an at-the-market equity offering program for up to $15.0 million in gross cash proceeds.

RBCCM will use commercially reasonable efforts to sell the common shares from time to time, based upon our instructions.

We have 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 our common shares.

During the three months ended December 31, 2021, 223,396 common shares were sold under the distribution agreement, resulting in $1.29 million in gross proceeds.

The commissions and direct costs of the offering program totaled $0.06 million and were recorded as an offset against gross proceeds.

On December 28, 2021, we reset the size of the at-the-market equity offering program with RBCCM, such that we may offer and sell, from time to time, common shares having an aggregate offering price of up to $10.7 million.

On March 2, 2021, we completed a registered public offering of an aggregate of 1,562,500 common shares, no par value, of the Company at an offering price of $6.40 per share for net proceeds of $8.89 million, after deducting underwriter fees and related offering expenses.

For the year ended September 30, 2021, the exercise of warrants and options as well as sales under an equity distribution agreement with RBCCM resulted in the issuance of 987,859 common shares and net cash proceeds to the Company of $5.12 million.

At December 31, 2021, we had cash and cash equivalents of $5.88 million, working capital of $8.14 million, shareholders’ equity of $10.55 million and an accumulated deficit of $30.87 million.

Subsequent to December 31, 2021, we sold 256,455 common shares under the current distribution agreement with RBCCM for gross proceeds of approximately $1.19 million.

We plan to finance company operations over the course of the next twelve months with cash and cash equivalents on hand, equity sales under the at-the-market offering program and reimbursements of eligible research and development expenses under our contribution agreement with the Canadian government.

Management has flexibility to adjust this timeline by making changes to planned expenditures related to, among other factors, the size and timing of clinical trial expenditures, staffing levels, and the acquisition or in-licensing of new product candidates.

To help fund our operations and meet our obligations in the future, we are planning to seek additional financing through government grants, equity sales, debt financings or other capital sources, including potential future licensing, collaboration or similar arrangements with third parties or other strategic transactions.

There is approximately $9.51 million available under the current equity distribution agreement with RBCCM.

If we determine it is advisable to raise additional funds, there is no assurance that adequate funding will be available to us or, if available, that such funding will be available on terms that we or our shareholders view as favorable.

Market volatility, inflation concerns and global disruptions related to the COVID-19 pandemic may have a significant impact on the availability of funding sources and the terms at which any funding may be available.

Market volatility, inflation and concerns related to the COVID-19 pandemic may have a significant impact on the availability of funding sources and the terms at which any funding may be available.

Research and Development

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Research and development expenses, which have historically varied based on the level of activity in our clinical programs, are significantly influenced by study initiation expenses and patient recruitment rates, and as a result are expected to continue to fluctuate, sometimes substantially.

Research and development expenses for any interim period are not necessarily indicative of the results to be expected for the full year or for any other future year or interim period.

Our research and development costs were $13.82 million and $2.17 million for the nine months ended June 30, 2021 and 2020, respectively.

The increase was primarily due to milestone payments related to advancement of our EB05 clinical program, increased external research expenses related to accelerated activity in our ongoing clinical studies, increased investigational drug product expenses and an increase in non-cash share-based compensation.

Higher salary and related personnel expenses and patent fees also contributed to the increase.

Our research and development costs were $3.95 million and $1.38 million for the three months ended December 31, 2021 and 2020, respectively.

The increase was due primarily to increased activities and preparations related to the ongoing Phase 2/Phase 3 clinical study of our EB05 drug candidate.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Quantitative and Qualitative Disclosures About Market Risk.

As a “smaller reporting company,” as defined by Rule 12b-2 of the Exchange Act, and pursuant to Item 305 of Regulation S-K, we are not required to provide quantitative and qualitative disclosures about market risk.

We are a smaller reporting company and are not required to provide disclosure under this item.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis