Grace Therapeutics, Inc. annual report, FY2021

Business context and reporting period

This is Acasti Pharma Inc.’s Form 10-K for the fiscal year ended March 31, 2021—not a filing by Grace Therapeutics, Inc. The “2020 Q4” metadata does not match the filing’s annual reporting period. Amounts below are in U.S. dollars; financial statement figures are in thousands unless stated otherwise.

Acasti had focused on developing CaPre, an omega-3 drug candidate for severe hypertriglyceridemia. After both Phase 3 TRILOGY trials failed to meet their primary endpoint, the company said it would not seek FDA approval or conduct further CaPre trials, and began evaluating strategic alternatives.

Key financial metrics

Fourth-quarter revenue was $115,000 and net loss was $5.646 million, compared with no revenue and net income of $16.616 million in the prior-year quarter. The prior-year quarterly income was driven in large part by warrant fair-value accounting; the filing’s summary table elsewhere reports $16.625 million, so the exact comparative quarterly figure is inconsistent in the source text.

FY2021 revenue came from producing and selling viral transport medium tubes for COVID-19 testing, not from CaPre. Gross profit on product sales was $120,000 ($196,000 revenue less $76,000 cost of sales); this small, new activity is not presented as a recurring revenue base.

Financing activities provided $59.490 million in cash, principally from the at-the-market share program. Acasti issued 117.7 million shares under the program for approximately $59.3 million net proceeds, at an average price of about $0.52 per share. Outstanding common shares rose from 90.2 million to 208.4 million during the fiscal year.

Material changes versus the prior period

• Annual net loss narrowed by $5.835 million as research and development spending fell $11.801 million and sales and marketing expense fell $1.523 million following the wind-down of CaPre trials and commercialization plans.
• The company recorded $5.703 million of impairment charges: $3.706 million on intangible assets, $1.584 million on equipment, and $413,000 on other assets and prepaids. The CaPre license’s carrying value was fully impaired.
• Financial expenses increased to $3.259 million from $1.075 million, mainly reflecting changes in the fair value of warrant liabilities and foreign-exchange losses.
• Cash and investments increased substantially following equity issuance. The filing reports $60.731 million combined at year-end; current liabilities were $1.579 million.

Outlook, risks, contingencies and unusual items

• Grace transaction: On May 7, 2021, after year-end, Acasti announced a definitive agreement to acquire Grace Therapeutics. The proposed all-share transaction was subject to Acasti shareholder, exchange and other approvals. Acasti shareholders were expected to own approximately 55% and Grace stockholders 45% of the combined company, subject to contractual adjustments. The filing expected closing in calendar Q3 2021; completion was not assured.
• CaPre and strategic review: Acasti planned to pursue potential third-party partnerships for CaPre, but gave no assurance that one would result. No further clinical trials were planned by Acasti. Management stated that the existing liquidity, reduced expenses and limited liabilities meant substantial doubt about going concern no longer existed for the year following issuance, while noting that future financing would be required and a strategic transaction was uncertain.
• Commitments: A $2.8 million remaining take-or-pay commitment to Aker for krill oil had no termination provision. Management was assessing recoverability and warned of a possible near-term loss. A $1.2 million advisor success fee was payable upon a successful strategic outcome.
• Listing and dilution: Nasdaq had notified Acasti of non-compliance with its $1.00 minimum bid-price rule. A hearing stayed further action while Nasdaq considered the company’s compliance plan, which included a possible share consolidation. Continued Nasdaq listing and listing of merger shares were transaction closing conditions. The merger and further equity financing could dilute existing shareholders.
• Other risks: Risks include the merger failing or being delayed, dependence on additional financing, foreign-exchange exposure, intellectual-property protection, and potential volatility from derivative warrant liabilities. The filing identified significant risk that Acasti could be classified as a PFIC for U.S. tax purposes. COVID-19 had not materially disrupted operations to date, but future effects were uncertain.

Important facts for investors to verify

• Confirm the filing identity and period: this is Acasti Pharma Inc.’s FY2021 10-K, not Grace Therapeutics’ 10-K or a calendar 2020 Q4 report.
• Check subsequent filings for the Grace transaction’s approval, closing status, final exchange ratio, share issuance and any share consolidation.
• Assess cash and investment balances against operating cash use, future financing needs, and the costs and timing of strategic plans.
• Verify the outcome and recoverability of the $2.8 million krill-oil commitment and the planned sale proceeds for CaPre-related equipment and other assets.
• Review Nasdaq compliance developments, outstanding warrants and options, and their potential effects on listing status and dilution.
• Consult the audited financial statements for the precise comparative Q4 net-income amount, which is inconsistent in the filing text provided.