Grace Therapeutics, Inc. quarterly report, Q1 FY2022

Business context and reporting period

This is Acasti Pharma Inc.’s unaudited Form 10-Q for the three months ended June 30, 2021, its fiscal first quarter. The filing is by Acasti—not Grace Therapeutics, Inc.; Acasti had agreed to acquire Grace, with closing still subject to approvals and other conditions. Amounts below are in U.S. dollars unless noted; financial statement figures are in millions.

Acasti had stopped pursuing CaPre after its two Phase 3 TRILOGY trials failed to meet their primary endpoints. It was reducing costs and evaluating strategic alternatives while pursuing a proposed merger with Grace, a rare- and orphan-disease drug developer.

Financial performance and liquidity

At June 30, 2021, total assets were $60.453 million, current assets $60.387 million, current liabilities $2.345 million, total liabilities $6.996 million, and working capital $58.042 million. Cash plus short-term investments totaled $57.722 million. Total liabilities included $4.651 million of derivative warrant liabilities, which the filing says are expected to be settled in shares; no conventional borrowings are reported. The filing gives no meaningful revenue-based margin figures.

Material changes and cash flows

• Net loss improved by $1.548 million year over year, chiefly because R&D costs fell after the CaPre trials ended and CaPre sales and marketing ceased. These savings were partly offset by higher transaction-related legal and professional fees in G&A.
• G&A rose by $1.027 million, with professional fees a major contributor. Net financial income was $0.027 million, versus net financial expense of $0.545 million in the prior-year quarter; warrant fair-value movements and foreign exchange affected the results.
• Cash declined by $9.967 million from March 31, 2021, to $40.975 million. Operating activities used $3.401 million; investing activities used $6.927 million, largely reflecting purchases of short-term investments. There were no ATM share sales in the quarter.
• Outstanding common shares were 208,375,549 at June 30, 2021. The proposed Grace transaction could substantially dilute Acasti shareholders.

Outlook, risks, contingencies, and unusual items

• Grace transaction: Acasti expected the merger to close in calendar Q3 2021, subject to Acasti shareholder and exchange approvals and other closing conditions. Grace stockholders were expected to own 42%–45% of the combined company and Acasti holders 55%–58%, on a fully diluted basis, subject to specified adjustments. Acasti estimated up to approximately 150 million new shares could be issued under illustrative assumptions.
• Nasdaq compliance: Acasti had received notice of noncompliance with Nasdaq’s $1.00 minimum bid-price rule. A Nasdaq Hearings Panel extended the compliance deadline, requiring shareholder approval for a possible share consolidation by August 26, 2021, and restored compliance by September 10, 2021. Nasdaq listing approvals were also merger conditions.
• Litigation: Four shareholder lawsuits challenged disclosures about the proposed merger and sought, among other relief, to delay or enjoin it. Acasti called the allegations meritless and intended to defend itself; it reported no accrued legal reserves at June 30. An unfavorable outcome could delay or prevent the merger, or result in costs or damages.
• Contract exposure: A take-or-pay krill-oil supply agreement had a remaining $2.8 million commitment due by October 31, 2021, with no termination provision. Because CaPre development was discontinued, management was assessing recoverability and warned of possible near-term loss. A further $0.8 million financial-advisor fee was contingent on a successful strategic outcome.
• Going concern and funding: Management said substantial doubt no longer existed about the company’s ability to continue as a going concern for one year from issuance, citing liquidity, reduced expenses, and limited liabilities. However, Acasti had a history of operating losses and negative operating cash flow, said future financing would be required, and noted there was no assurance the merger or another strategic transaction would close.
• Other risks: CaPre’s trial failures, uncertain value of assets held for sale, foreign-exchange exposure, merger-related dilution, and potential Nasdaq delisting remain relevant. Management reported no significant COVID-19 disruption to date. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.

Important facts for investors to verify

1. Whether the Grace merger received required shareholder, exchange, and Nasdaq approvals and closed, and the final exchange ratio, share issuance, and ownership split.
2. Whether Acasti met Nasdaq’s bid-price and listing requirements, including the outcome of any shareholder-approved share consolidation.
3. Cash burn and remaining liquidity after quarter-end, including whether additional financing was needed and on what terms.
4. Recoverability or disposition of the krill-oil inventory and equipment, and the ultimate cost of the $2.8 million take-or-pay commitment.
5. Developments in the four merger-related lawsuits and any resulting costs, delays, or effect on the transaction.