Edesa Biotech, Inc. 10-Q

Item 2. 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, 2023 and our audited consolidated financial statements for the year ended September 30, 2022 included in our Annual Report on Form 10-K, as amended, filed with the Securities and Exchange Commission (the “SEC”) on December 16, 2022. This Quarterly Report on Form 10-Q contains forward-looking statements. When used in this report, the words “expects,” “anticipates,” “suggests,” “believes,” “intends,” “estimates,” “plans,” “projects,” “continue,” “ongoing,” “potential,” “expect,” “predict,” “believe,” “intend,” “may,” “will,” “should,” “could,” “would” and similar expressions are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described in our Annual Report on Form 10-K for the year ended September 30, 2022 and other reports we file with the Securities and Exchange Commission. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made. 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, 2023 and September 30, 2022, and for the three and nine months ended June 30, 2023 and 2022 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. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Overview We are a biopharmaceutical company developing innovative ways to treat inflammatory and immune-related diseases. Our approach is to acquire, develop and commercialize drug candidates based on mechanisms of action that have demonstrated proof-of-concept in human subjects. We prioritize our efforts on disease indications where there is compelling scientific rationale, no approved therapies or where there are unmet medical needs, and where there are large addressable market opportunities, among other factors. We have multiple late-stage product candidates in our development pipeline. Our most advanced drug candidate is EB05 (paridiprubart), a monoclonal antibody developed for acute and chronic disease indications that involve dysregulated innate immunity responses. EB05 inhibits toll-like receptor 4 (TLR4), a key immune signaling protein and an important mediator of inflammation. We are currently evaluating EB05 as a potential treatment for Acute Respiratory Distress Syndrome (ARDS), a life-threatening form of respiratory failure. In September 2022, we reported final results from the Phase 2 part of a Phase 2/Phase 3 study of EB05 in ARDS patients who were hospitalized for Covid-19-related respiratory disease. Among the findings, EB05 demonstrated statistically significant mortality reductions in critically ill hospitalized patients treated with EB05 plus Standard of Care treatment (SOC). Based in part of these findings, the U.S. Food and Drug Administration (FDA) granted us a Fast Track designation. We are currently enrolling patients in the Phase 3 part of the EB05 study. In addition to EB05, we are developing product candidates for a number of chronic dermatological and inflammatory conditions. We recently reported preliminary, topline results from a Phase 2b clinical study evaluating multiple concentrations of our drug candidate, EB01, as a monotherapy for moderate-to-severe chronic Allergic Contact Dermatitis (ACD), a common occupational skin condition. Among the preliminary findings, 1.0% EB01 (daniluromer) cream demonstrated statistically significant improvement over placebo for the primary endpoint and a key secondary endpoint. We are preparing for an End of Phase 2 meeting with FDA following full analysis. In January 2023, Health Canada approved our clinical trial application (CTA) for our EB06 monoclonal antibody candidate to conduct a future Phase 2 study in vitiligo, a common autoimmune disorder that causes skin to lose its color in patches. We are also preparing an investigational new drug application (IND) in the United States for our EB07 (paridiprubart) product candidate to conduct a future Phase 2 study in systemic sclerosis (SSc), an autoimmune rheumatic disorder that causes fibrosis (scarring/hardening) of skin and internal organs. 15 Table of Contents Recent Developments EB05 (paridiprubart) In June 2023, we announced positive findings from an in vitro study of paridiprubart against a panel of respiratory pathogens. The research results demonstrated that inflammation signaling from multiple pathogens, including Influenza A, coronavirus and a common bacterium ( H. influenzae ), was inhibited by paridiprubart. Based on these findings and our clinical experience with paridiprubart, we believe that our drug candidate could provide an effective treatment for ARDS caused by, among others, coronaviruses, pandemic influenza and harmful bacteria. The in vitro study was conducted in collaboration with the University of Toronto under a grant from the Government of Canada's Strategic Innovation Fund. In March 2023, we announced that the company and the FDA agreed on the primary endpoint and population for the Phase 3 part of a Phase 2/3 study evaluating our monoclonal antibody candidate, EB05, as a therapy for hospitalized Covid-19 patients with ARDS. Under the amended protocol design, Edesa will evaluate a single cohort of severely ill patients on invasive mechanical ventilation, both with and without additional organ support such as extracorporeal membrane oxygenation (ECMO). Edesa plans to enroll approximately 600 evaluable hospitalized subjects. The primary endpoint will be the mortality rate at 28 days. Last year, Canadian regulators approved a similar Phase 3 study of EB05 in Covid-19-induced ARDS among two separate cohorts of patients, and we are evaluating potential future harmonization of the Canadian protocol with the U.S. protocol. With recruitment open in both the U.S. and Canada, we discontinued recruitment at secondary sites, which were located in Poland and Colombia. In April 2023, we announced the World Health Organization and the United States Adopted Name (USAN) Council have adopted the international nonproprietary name “paridiprubart” for our anti-TLR4 monoclonal antibody candidate. Based on current hospitalization trends and our recruitment experience, we believe that Covid-19-related hospitalization patterns have become more predictable and seasonal in nature, similar to those of influenza, with increased hospitalizations and deaths anticipated in the fall/winter and among populations and geographies with low booster/vaccination rates. As a result, we believe that the pace of future enrollment will be more closely linked to the number and location of investigational sites we activate rather than the unpredictable waves of the pandemic. Subject to funding, we plan to increase the number of investigational centers from 23 to up to 60 hospitals in the U.S. and Canada. We have the flexibility to adjust the timing of these and other clinical trial expenditures to manage our working capital. In addition to Covid-19 induced ARDS, we are also exploring various approaches to evaluate our EB05 (paridiprubart) drug candidate in a general ARDS population, including, among other potential options, participating in a government-sponsored platform study, amending our current Phase 3 study protocol to include non-Covid-19 ARDS patients and initiating a separate study or cohort. Given the broader pool of patients, we believe a harmonized or general ARDS study could increase efficiency and expedite development timelines as well as validate the broader potential utility of paridiprubart. Any changes we make to our clinical study protocol may impact how previously enrolled subjects are categorized and/or included in the study’s results. EB01 (daniluromer) In June 2023, we announced the assignment of the name "daniluromer" to the active pharmaceutical ingredient in our EB01 drug candidate, a topical formulation of daniluromer that we are developing as a treatment for Allergic Contact Dermatitis. We expect daniluromer to be published in an upcoming World Health Organization (WHO) list of recommended international nonproprietary names. The WHO, under its International Nonproprietary Names program, provides a globally recognized system for selecting unique names to identify pharmaceutically active substances. Significant Accounting Policies and Estimates See Note 3 to our financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2022 for a discussion of our significant accounting policies and estimates. There have been no material changes to such critical accounting policies or estimates. Results of Operations Comparison of the Three Months Ended June 30, 2023 and 2022 Total operating expenses decreased by $3.74 million to $2.06 million for the three months ended June 30, 2023 compared to $5.80 million for the same period last year: · Research and development expenses decreased by $3.52 million to $1.03 million for the three months ended June 30, 2023 compared to $4.55 million for the same period last year primarily due to decreased external research expenses related to our ongoing clinical studies and manufacturing of our investigational drugs. In the comparative period, the Company purchased bulk drug product of EB05 for its clinical study for $2.54 million. · General and administrative expenses decreased by $0.21 million to $1.04 million for the three months ended June 30, 2023 compared to $1.25 million for the same period last year primarily due to decreased non-cash share-based compensation. Total other income increased by $0.07 million to $0.08 million for the three months ended June 30, 2023 compared to $0.01 million for the same period last year primarily due to an increase in interest earned on cash balances. 16 Table of Contents For the three months ended June 30, 2023, our net loss was $1.98 million, or $0.10 per common share, compared to a net loss of $5.79 million, or $0.37 per common share, for the three months ended June 30, 2022. Comparison of the Nine Months Ended June 30, 2023 and 2022 Total operating expenses decreased by $8.68 million to $6.85 million for the nine months ended June 30, 2023 compared to $15.53 million for the same period last year: · Research and development expenses decreased by $7.70 million to $3.84 million for the nine months ended June 30, 2023 compared to $11.54 million for the same period last year primarily due to decreased external research expenses related to our ongoing clinical studies and manufacturing of our investigational drugs, and a decrease in non-cash share-based compensation. · General and administrative expenses decreased by $0.98 million to $3.01 million for the nine months ended June 30, 2023 compared to $3.99 million for the same period last year primarily due to decreased personnel expenses and non-cash share-based compensation. Total other income decreased by $0.60 million to $0.20 million for the nine months ended June 30, 2023 compared to $0.80 million for the same period last 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 nine months ended June 30, 2023, our net loss was $6.65 million, or $0.34 per common share, compared to a net loss of $14.74 million, or $1.04 per common share, for the nine months ended June 30, 2022. Capital Expenditures Our capital expenditures primarily consist of computer and office equipment. There were no significant capital expenditures for the three and nine months ended June 30, 2023 and 2022. 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, exercises of common share purchase warrants, convertible preferred shares, convertible loans, government grants and tax incentives. For the nine-month periods ended June 30, 2023 and 2022, we reported net losses of $6.65 million and $14.74 million, respectively. On March 27, 2023, we entered into an equity distribution agreement with Canaccord Genuity LLC (Canaccord), 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 $20 million in gross cash proceeds, subject to certain offering limitations that currently allow the Company to offer and sell common shares having an aggregate gross sales price of up to $8.37 million. Canaccord 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 common shares and may at any time suspend sales under the equity distribution agreement or terminate the equity distribution agreement in accordance with its terms. The total amount of cash that may be generated under this equity distribution agreement is uncertain and depends on a variety of factors, including market conditions and the trading price of our common shares. For the three months ended June 30, 2023, we sold a total of 808,107 common shares pursuant to the agreement. After deducting commissions and costs, net proceeds totaled $0.69 million. Subsequent to the quarter end, sales under the agreement have resulted in the issuance of 226,882 common shares and receipt of net cash proceeds of $0.19 million after deducting sales agent commissions. In November 2022, we completed a private placement of units consisting of 2,691,337 common shares, three-year warrants to purchase up to an aggregate of 1,345,665 common shares (Class A warrants) and twelve-month warrants to purchase up to an aggregate of 1,345,665 common shares (Class B warrants). The gross proceeds from this offering are approximately $3.03 million, before offering expenses. During the nine months ended June 30, 2023, 705,314 shares have been issued upon the exercise of Class A and Class B warrants, with proceeds to the Company of $0.77 million. 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. 17 Table of Contents From November 2021 to March 2022, we sold a total of 626,884 common shares under an “at-the-market” equity distribution program which resulted in net proceeds of $2.62 million after deducting commissions and direct costs. Under our contribution agreement with the Canadian government’s Strategic Innovation Fund (SIF), we were 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. All grant reimbursements were received by December 31, 2022. At June 30, 2023, we had cash and cash equivalents of $6.46 million, working capital of $5.39 million, shareholders’ equity of $7.85 million and an accumulated deficit of $50.70 million. We plan to finance company operations over the course of the next twelve months with cash and cash equivalents on hand and equity sales under the at-the-market offering program. 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 Our primary business is the development of innovative therapeutics for inflammatory and immune-related diseases with clear unmet medical needs. We focus our resources on research and development activities, including the conduct of clinical studies and product development, and expense such costs as they are incurred. Our research and development expenses have primarily consisted of employee-related expenses, including salaries, benefits, taxes, travel and share-based compensation expense for personnel in research and development functions; expenses related to process development and production of product candidates paid to contract manufacturing organizations and contract testing organizations, including the cost of acquiring, developing, and manufacturing research material; costs associated with clinical activities, including expenses for contract research organizations; and clinical trials and activities related to regulatory filings for our product candidates, including regulatory consultants. 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. Our research and development costs were $3.84 million and $11.54 million for the nine months ended June 30, 2023 and 2022, respectively. The decrease was due primarily to decreased external research expenses related to our ongoing clinical studies and manufacturing of our investigational drugs. Off-Balance Sheet Arrangements 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk. We are a smaller reporting company and are not required to provide disclosure under this item.