What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-12-16 compared with 2021-12-28 · 32 added, 42 removed, 83 unchanged (47% of the section changed)

5 unchanged sentences

and Edesa Biotech USA, Inc.

(formerly known as Stellar Biotechnologies, Inc.).

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

We have devoted substantially all of our efforts to research and development, including clinical trials, and have not completed the development of any of our drug candidates.

We believe our working capital, remaining grant funds and available equity distribution sales are sufficient to support the Company’s operations for at least the next 12 months.

We believe our cash and cash equivalents on hand, including net proceeds from equity offering completed subsequent to the end of the fiscal year, and reimbursements of eligible research and development expenses under our contribution agreement with the Canadian government are sufficient to support the Company’s operations for at least the next 12 months.

As a clinical-stage biopharmaceutical company, we expect to continue to incur significant expenses and operating losses for the foreseeable future as we continue the development of, and seek marketing approvals for our product candidates, prepare for and begin the commercialization of any approved products, and add infrastructure and personnel to support our product development efforts and operations as a public company in the United States and Canada.

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Fiscal Year Ended September 30, 2022 Compared to the Fiscal Year Ended September 30, 2021

There were no revenues for the year ended September 30, 2021 compared to $0.33 million for the prior year, reflecting the winddown and discontinuation of sales of product inventory from legacy operations.

Our total operating expenses increased by $16.95 million to $23.68 million for the year ended September 30, 2021 compared to $6.73 million for the prior year:

There was no cost of sales for the year ended September 30, 2021 compared to $0.02 million for the prior year, reflecting the winddown and discontinuation of sales of product inventory from legacy operations.

Research and development expenses increased by $14.62 million to $17.95 million for the year ended September 30, 2021 compared to $3.33 million for the prior 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 $2.35 million to $5.73 million for the year ended September 30, 2021 compared to $3.38 million for the prior 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 $10.30 million to $10.34 million for the year ended September 30, 2021 compared to $0.04 million for the prior year primarily due to increased grant income under our federal reimbursement grant with the Canadian government’s Strategic Innovation Fund.

Our total operating expenses decreased by $5.31 million to $18.37 million for the year ended September 30, 2022 compared to $23.68 million for the prior year:

Research and development expenses decreased by $4.61 million to $13.34 million for the year ended September 30, 2022 compared to $17.95 million for the prior year primarily due to decreased milestone payments, external research expenses related to our clinical studies and investigational drug product manufacturing expenses, which were partially offset by increased personnel expenses.

General and administrative expenses decreased by $0.69 million to $5.04 million for the year ended September 30, 2022 compared to $5.73 million for the prior year primarily due to a decrease in noncash share-based compensation, which was partially offset by increased public company expenses.

Total other income decreased by $9.52 million to $0.82 million for the year ended September 30, 2022 compared to $10.34 million for the prior year primarily due to a decrease in grant income associated with the completion of clinical study activities under our federal reimbursement grant with the Canadian government’s Strategic Innovation Fund.

For the year ended September 30, 2022, our net loss was $17.55 million, or $1.05 per common share, compared to a net loss of $13.34 million, or $1.10 per common share, for the year ended September 30, 2021.

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For the years ended September 30, 2022 and 2021, we reported net losses of $17.55 million and $13.34 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 ($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.

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 our equity distribution agreement with RBC Capital Markets, LLC resulted in the issuance of 987,859 common shares and net cash proceeds to the Company of $5.12 million.

On November 22, 2021, we entered into a new equity distribution agreement with RBC Capital Markets, LLC (RBCCM), as sales agent, pursuant to which the Company may offer and sell, from time to time, common shares through an at-the-market equity offering program for up to $15 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.

In March 2022, we completed a registered direct offering of 1,540,000 common shares, no par value, and pre-funded warrants to purchase up to an aggregate of 1,199,727 common shares.

In a concurrent private placement, we issued common share purchase warrants to purchase an aggregate of up to 2,739,727 common shares.

After deducting the placement agent fees and offering expenses, net proceeds to the Company were approximately $9.01 million.

In November 2021, we entered into an equity distribution agreement with RBC Capital Markets, LLC (RBCCM), as sales agent, which was subsequently terminated in March 2022.

Pursuant to the terms of the agreement, as amended, the Company could offer and sell, from time to time, common shares through an at-the-market offering program for up to $15.4 million in gross cash proceeds.

During the term of the agreement, we sold a total of 626,884 common shares.

After deducting commissions and direct costs, net proceeds totaled approximately $2.62 million.

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 years ended September 30, 2022 and 2021, we recorded grant income of $0.78 million and $10.34 million respectively.

At September 30, 2022, the Company had cash and cash equivalents of $7.09 million, working capital of $6.95 million, shareholders’ equity of $9.39 million and an accumulated deficit of $44.04 million.

Subsequent to the fiscal year end, we sold 223,396 common shares under the current distribution agreement with RBCCM for gross proceeds of approximately $1.29 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 may also seek additional financing through the sale of equity, government grants, debt financings or other capital sources, including potential future licensing, collaboration or similar arrangements with third parties or other strategic transactions.

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

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.

Subsequent to the fiscal year end, on November 2, 2022, we completed a private placement of units consisting of 2,691,337 common shares, 12-month warrants to purchase up to an aggregate of 1,345,665 common shares and 3-year warrants to purchase up to an aggregate of 1,345,665 common shares.

The gross proceeds from this offering are approximately $3.0 million, before offering expenses.

We plan to finance company operations over the course of the next twelve months with cash and cash equivalents on hand, including net proceeds from equity offering completed subsequent to the end of the fiscal year, 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 and manufacturing campaigns, 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 plan to 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.

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, interest rates, government policies and concerns related to the war in Ukraine and 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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Our research and development costs were $13.34 million and $17.95 million for the years ended September 30, 2022 and 2021, 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 as a potential treatment for hospitalized COVID-19 patients.

The decrease was due primarily to decreased milestone payments, external research expenses related to our ongoing clinical studies and investigational drug product manufacturing expenses, which were partially offset by increased personnel expenses.

Off Balance Sheet Arrangements

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Concentration of Credit Risk

We are potentially subject to financial instrument concentration of credit risk through our cash and cash equivalents, US Treasury bills and accounts and other receivable.

We place our cash and cash equivalents in US Treasury bills, money market mutual funds of U.S.

We are potentially subject to financial instrument concentration of credit risk through our cash and cash equivalents, and accounts and other receivable.

We place our cash and cash equivalents in money market mutual funds of U.S.

government securities or financial institutions believed to be credit worthy and perform periodic evaluations of their relative credit standing.

There were no Treasury bills outstanding at September 30, 2021 and 2020.

Accounts receivable can be potentially exposed to a concentration of credit risk with our major customers.

We assess the collectability of our accounts receivable through a review of our current aging, as well as an analysis of our historical collection rate, general economic conditions and credit status of our customers.

Accounts and other receivable also include Harmonized Sales Tax (HST) refunds receivable from the Canada Revenue Agency and reimbursements receivable from the Canadian government’s Strategic Innovation Fund (SIF).

Accounts and other receivable include Harmonized Sales Tax (HST) refunds receivable from the Canada Revenue Agency and reimbursements receivable from the Canadian government’s Strategic Innovation Fund (SIF).

We assess the collectability of our accounts receivable through a review of our current aging and payment terms, as well as an analysis of our historical collection rate, general economic conditions and credit status of the government agencies.

As of September 30, 2022 and 2021, all outstanding accounts and other receivable were deemed to be fully collectible, and therefore, no allowance for doubtful accounts was recorded.

We determine terms and conditions for our customers primarily based on the volume purchased by the customer, customer creditworthiness and past transaction history.

Management works to mitigate our concentration of credit risk with respect to accounts receivable through our credit evaluation policies, reasonably short payment terms and geographical dispersion of sales.

Significant Accounting Policies and Estimates

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Accounts and other receivable include Harmonized Sales Tax (HST) refunds receivable and reimbursements receivable from the Canadian government’s Strategic Innovation Fund (SIF).

As of September 30, 2021, all outstanding amounts were deemed to be fully collectible, and therefore, no allowance for doubtful accounts was recorded.

As of September 30, 2022, all outstanding accounts, grants and HST refunds receivable were deemed to be fully collectible, and therefore, no allowance for doubtful accounts was recorded.

Intangible assets

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Right-of-Use assets

We adopted Accounting Standards Codification (ASC) Topic 842 Leases for the year ended September 30, 2020 using the modified retrospective transition method.

We elected the package of practical expedients in transition and 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, we recognized operating lease right-of-use (ROU) assets and operating lease liabilities 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.

There were three short-term operating leases upon adoption that did not follow the ROU model.

We recognize operating lease right-of-use (ROU) assets and operating lease liabilities on the balance sheet for operating leases with terms longer than 12 months.

We follow the ongoing practical expedient not to recognize operating lease right-of-use assets and operating lease liabilities for short-term leases.

The ROU assets are initially measured at cost and amortized using the straight-line method through the end of the lease term.

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We grant options to buy common shares of the Company to our directors, officers, employees and consultants, and grant other equity-based instruments such as warrants to non- employees.

The fair value of share-based compensation is measured on the date of grant, using the Black-Scholes option valuation model and is recognized over the vesting period net of estimated forfeitures for employees or the service period for non-employees.

The fair value of share-based compensation is measured on the date of grant, using the Black-Scholes option valuation model and is recognized over the vesting period for employees or the service period for non-employees, net of forfeitures as they occur.

The provisions of our share-based compensation plans do not require the Company to settle any options by transferring cash or other assets, and therefore we classify the awards as equity.

The Black-Scholes option valuation model requires the input of subjective assumptions, including price volatility of the underlying stock, risk-free interest rate, dividend yield, and expected life of the option.

The Black-Scholes option valuation model requires the input of subjective assumptions, including price volatility of the underlying common shares, risk-free interest rate, dividend yield, and expected life of the option.

Translation of foreign currency transactions

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Accumulated gains and losses resulting from the translation of the financial statements of the Canadian operation are included as part of accumulated other comprehensive loss, a separate component of shareholders' equity.

In respect of other transactions denominated in currencies other than our functional currency, the monetary assets and liabilities are translated at the year-end rates.

For other transactions denominated in currencies other than our functional currency, the monetary assets and liabilities are translated at the year-end rates.

Revenue and expenses are translated at rates of exchange prevailing on the transaction dates.

11 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis