The accompanying consolidated financial statements include the assets, liabilities and expenses of DiaMedica Therapeutics Inc., and our wholly-owned subsidiaries, DiaMedica USA, Inc. and DiaMedica Australia Pty Ltd. All significant intercompany transactions and balances have been eliminated in consolidation.

 

 

The United States dollar is our functional currency as it represents the economic effects of the underlying transactions, events and conditions and various other factors including the currency of historical and future expenditures and the currency in which funds from financing activities are mostly generated by the Company. A change in the functional currency occurs only when there is a material change in the underlying transactions, events and condition. A change in functional currency could result in material differences in the amounts recorded in the consolidated statement of loss and comprehensive loss for foreign exchange gains and losses. All amounts in the accompanying consolidated financial statements are in U.S. dollars unless otherwise indicated.

 

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

 

 

The Company considers all bank deposits, including money market funds, and other investments, purchased with an original maturity to the Company of months or less, to be cash and cash equivalents. The carrying amount of our cash equivalents approximates fair value due to the short maturity of the investments.

 

 

Financial instruments that potentially expose the Company to concentration of credit risk consist primarily of cash, cash equivalents and marketable securities. The Company maintains its cash balances primarily with financial institutions. These balances generally exceed federally insured limits. The Company has experienced any losses in such accounts and believes it is exposed to any significant credit risk in cash and cash equivalents. The Company believes that the credit risk related to marketable securities is limited due to the adherence to an investment policy focused on the preservation of principal.

 

 

The Company’s marketable securities typically consist of obligations of the United States government and its agencies and investment grade corporate obligations, which are classified as available-for-sale and included in current assets as they are intended to fund current operations. Securities are valued based on market prices for similar assets using party certified pricing sources. Available-for-sale securities are carried at fair value with unrealized gains and losses reported as a component of shareholders’ equity in accumulated other comprehensive income (loss). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization or accretion is included in interest income. Realized gains and losses, if any, are calculated on the specific identification method and are included in other income in the consolidated statements of operations.

 

Available-for-sale securities are reviewed for possible impairment at least quarterly, or more frequently if circumstances arise that indicate impairment. When the fair value of the securities declines below the amortized cost basis, impairment is indicated and it must be determined whether it is other than temporary. Impairment is considered to be other than temporary if the Company: (i) intends to sell the security, (ii) will more likely than be forced to sell the security before recovering its cost, or (iii) does expect to recover the security’s amortized cost basis. If the decline in fair value is considered other than temporary, the cost basis of the security is adjusted to its fair market value and the realized loss is reported in earnings. Subsequent increases or decreases in fair value are reported as a component of shareholders’ equity in accumulated other comprehensive income (loss). There were other-than-temporary unrealized losses as of

 

 

Under the authoritative guidance for fair value measurements, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The authoritative guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing 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 assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The categorization of financial assets and financial liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

The hierarchy is broken down into levels defined as follows:

 

— quoted prices in active markets for identical assets and liabilities

— observable inputs other than quoted prices in active markets for identical assets and liabilities

— unobservable inputs

 

As of the Company believes that the carrying amounts of its other financial instruments, including amounts receivable, accounts payable and accrued liabilities, approximate their fair value due to the short-term maturities of these instruments. See Note titled “” for additional information.

 

 

Property and equipment are stated at purchased cost less accumulated depreciation. Depreciation of property and equipment is computed using the straight-line method over their estimated useful lives of to years for office equipment and years for computer equipment. Upon retirement or sale, the cost and related accumulated depreciation are removed from the consolidated balance sheets and the resulting gain or loss is reflected in the consolidated statements of operations. Repairs and maintenance are expensed as incurred.

 

Long-lived assets are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the asset or related group of assets be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized at that time. Measurement of impairment be based upon appraisal, market value of similar assets or discounted cash flows.

 

 

We followed ASC “Revenue from Contracts with Customers” in accounting for our former license and collaboration agreement with Ahon Pharmaceutical Co Ltd. Accordingly, the Company recognizes revenue upon transfer of control of the product to our customer in an amount that reflects the consideration we expect to receive in exchange.

 

We intend to enter into arrangements for the research and development (R&D) and/or manufacture of products and product candidates. Such arrangements require us to deliver various rights, services and/or goods, including (i) intellectual property rights or licenses, (ii) R&D services or (iii) manufacturing services. The underlying terms of these arrangements generally would provide for consideration to DiaMedica in the form of nonrefundable, up-front license fees, development and commercial-performance milestone payments, cost sharing, royalty payments and/or profit sharing.

 

In arrangements involving more than performance obligation, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on its respective relative stand-alone selling price. The estimated selling price of each deliverable reflects our best estimate of what the selling price would be if the deliverable was regularly sold by us on a stand-alone basis or using an adjusted market assessment approach if selling price on a stand-alone basis is available.

 

The consideration allocated to each distinct performance obligation is recognized as revenue when control of the related goods or services is transferred. Consideration associated with at-risk substantive performance milestones is recognized as revenue when it is probable that a significant reversal of the cumulative revenue recognized will occur. We intend to utilize the sales and usage-based royalty exception in arrangements that resulted from the license of intellectual property, recognizing revenues generated from royalties or profit sharing as the underlying sales occur.

 

 

Research and development costs include expenses incurred in the conduct of human clinical trials, for -party service providers performing various treatment, testing and data accumulation and for analysis related to clinical studies; sponsored non-clinical research agreements; developing the manufacturing process necessary to produce sufficient amounts of the compound for use in our clinical studies; consulting resources with specialized expertise related to execution of our development plan for our product candidate; and personnel costs, including salaries, benefits and share-based compensation.

 

We charge research and development costs, including clinical trial costs, to expense when incurred. Our human clinical trials are performed at clinical trial sites and are administered jointly by us with assistance from contract research organizations. Costs of setting up clinical trial sites are accrued upon execution of the study agreement. Expenses related to the performance of clinical trials are accrued based on estimates of work completed to date by CROs, outside contractors and clinical trial sites that manage and perform the trials, and those that manufacture the investigational product. We obtain initial estimates of total costs based on the trial protocol, extent of enrollment of subjects, trial duration, project management costs, manufacturing costs, patient treatment costs and other activities as required by the trial protocol. Additionally, actual costs be charged to us and are recognized as the tasks are completed by the clinical trial site. Accrued clinical trial costs be subject to revisions as clinical trials progress and any revisions are recorded in the period in which the facts that give rise to the revisions become known.

 

 

Costs associated with applying for, prosecuting and maintaining patents are expensed as incurred given the uncertainty of patent approval and, if approved, the resulting probable future economic benefit to the Company. Patent-related costs, consisting primarily of legal expenses and filing/maintenance fees, are included in research and development costs and were and for the years ended and respectively.

 

 

The cost of employee and non-employee services received in exchange for awards of equity instruments is measured and recognized based on the estimated grant date fair value of those awards. Compensation cost is recognized ratably using the straight-line attribution method over the vesting period, which is considered to be the requisite service period. We record forfeitures in the periods in which they occur.

 

The fair value of share-based awards is estimated at the date of grant using the Black-Scholes option pricing model. The determination of the fair value of share-based awards is affected by our share price, as well as assumptions regarding a number of complex and subjective variables. Risk free interest rates are based upon United States Government bond rates appropriate for the expected term of each award. Expected volatility rates are based on the historical volatility over a term equal to the expected life of the option. The assumed dividend yield is zero, as we do expect to declare any dividends in the foreseeable future. The expected term of options is estimated considering the vesting period at the grant date, the life of the option and the average length of time similar grants have remained outstanding in the past.

 

 

We account for common share purchase warrants as either equity instruments or as liabilities depending on the specific terms of the warrant agreements. Generally, warrants are classified as equity, as opposed to liabilities, as the agreements do include the potential for a cash settlement or an adjustment to the exercise price and are therefore deemed to be indexed to the Company’s own shares. Certain of the Company’s common share purchase warrants which matured in were deemed to be derivative instruments and required to be reported at fair value. The fair value of common share purchase warrants is disclosed in Note titled “Warrant Liability.”

 

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted rates, for each of the jurisdictions in which the Company operates, expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is more likely than to be realized. The Company has provided a full valuation allowance against the gross deferred tax assets as of and See Note “Income Taxes” for additional information. The Company’s policy is to classify interest and penalties related to income taxes as income tax expense.

 

 

Government assistance relating to research and development performed by DiaMedica Australia Pty Ltd. is recorded as a component of Other (income) expense. Government assistance is recognized when the related expenditures are incurred. We recognized and of other income related to research activities performed in and respectively.

 

 

We compute net loss per share by dividing our net loss (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Shares issued during the period and shares reacquired during the period, if any, are weighted for the portion of the period that they were outstanding. The computation of diluted earnings per share, or EPS, is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Our diluted EPS is the same as basic EPS due to the exclusion of common share equivalents as their effect would be anti-dilutive.

 

The following table summarizes our calculation of net loss per common share for the periods presented (in thousands, except share and per share data):

 

		Year Ended December 31,
		2019				2018
Net loss		$	(10,649	)		$	(5,734	)
Weighted average shares outstanding—basic and diluted			11,987,696				7,743,520
Basic and diluted net loss per share		$	(0.89	)		$	(0.74	)

 

The following outstanding potential common shares were included in the diluted net loss per share calculations as their effects were dilutive:

 

		Year Ended December 31,
		2019				2018
Employee and non-employee stock options			1,220,359				639,359
Common shares issuable under common share purchase warrants			971,953				807,563
Common shares issuable under deferred unit plan			21,183				21,183
			2,213,495				1,468,105

 

 

In the Financial Accounting Standards Board (FASB) issued a new accounting standard that amended the guidance for the recognition of revenue from contracts with customers to transfer goods and services. The FASB subsequently issued additional, clarifying standards to address issues arising from implementation of the new revenue recognition standard. The new revenue recognition standard and clarifying standards require an entity to recognize revenue when control of promised goods or services is transferred to the customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted this new standard as of The adoption as of this date had impact on our consolidated financial statements, as we had revenue until the quarter of We followed ASC “Revenue from Contracts with Customers” in accounting for our former license and collaboration agreement with Ahon Pharmaceutical Co Ltd. (Note ).

 

In the FASB issued Accounting Standards Update (ASU) - . The guidance in ASU - supersedes the lease recognition requirements in the Accounting Standards Codification Topic Leases. ASU - requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The new standard requires the immediate recognition of all excess tax benefits and deficiencies in the income statement and requires classification of excess tax benefits as an operating activity as opposed to a financing activity in the statements of cash flows. This standard became effective for us on

 

The FASB has subsequently issued the following amendments to ASU - which have the same effective date and transition date of and which we collectively refer to as the new leasing standards:

 

 

 

 

 

We adopted the new leasing standards on using a modified retrospective transition approach to be applied to leases existing as of, or entered into after, and, consequently, financial information will be updated and the disclosures required under Topic will be provided for dates and periods prior to We have reviewed our existing lease contracts and the impact of the new leasing standards on our consolidated results of operations, financial position and disclosures. Upon adoption of the new leasing standards, we recognized a lease liability and related right-of-use asset on our consolidated balance sheet of approximately

 

In the FASB issued ASU - “Improvements to Nonemployee Share-Based Payment Accounting,” to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. This ASU is effective for public entities for fiscal years beginning after Prior to the adoption of this ASU, share-based compensation awarded to non-employees was subject to revaluation over its vesting terms. Subsequent to the adoption of this ASU, non-employee share-based payment awards are measured on the date of grant, similar to share-based payment awards granted to employees. We adopted this standard on and the adoption of this ASU did have a material impact on our financial position or our consolidated statements of operations.