Grace Therapeutics, Inc. annual report, Q4 FY2018

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Filing summary

Entity and period: The supplied filing is Acasti Pharma Inc.’s Form 20-F annual report for the fiscal year ended March 31, 2018, filed June 29, 2018. It is not a filing for Grace Therapeutics, Inc.; investors should confirm the issuer and filing intended. Financial amounts below are in thousands of Canadian dollars unless otherwise stated. The requested “2017 Q4” does not match the filing’s annual reporting period; the report separately provides fourth-quarter data for the three months ended March 31, 2018.

Business context

Acasti is a clinical-stage biopharmaceutical company developing CaPre, a krill-oil-derived omega-3 candidate initially intended to treat severe hypertriglyceridemia. It reported no product sales and depended on external financing. The company’s principal development effort was its two-study TRILOGY Phase 3 program.

Financial results and liquidity

  • Revenue and margins: Sales revenue was nil in fiscal 2018 and fiscal 2017. With no sales, the filing provides no meaningful commercial gross margin.
  • Losses: Fiscal 2018 operating loss was $19.696 million and net loss was $21.504 million, or $1.23 per share. The comparative fiscal 2017 period was 13 months, with net loss of $11.247 million; the differing period lengths limit direct comparison. Non-IFRS operating loss was $16.095 million versus $7.798 million for that 13-month period.
  • Fourth quarter: Net loss for the three months ended March 31, 2018 was $8.140 million, or $0.32 per share, compared with $2.597 million for the three months ended February 28, 2017. Fourth-quarter non-IFRS operating loss was $6.427 million. The company attributed the increased operating loss chiefly to Phase 3 clinical and manufacturing scale-up costs.
  • Costs: Fiscal 2018 R&D expense was $15.669 million, up from $7.653 million in the prior 13-month period; G&A was $4.027 million versus $3.557 million. R&D increases primarily reflected Phase 3 CRO work and contract manufacturing.
  • Cash flow: Operating activities used $12.519 million; investing activities used $0.411 million; financing activities provided $11.406 million. Cash and cash equivalents declined by $1.549 million to $8.223 million at year-end.
  • Liquidity and working capital: Current assets were $9.492 million and current liabilities $6.697 million, yielding reported working capital of $2.795 million. Management said year-end cash was expected to fund operating and capital requirements only through September 2018, on its then-current estimate. It warned that even after subsequent financing, resources were expected to be insufficient for projected obligations and expenses over the next 12 months without further funding or partnerships.
  • Debt and liabilities: Total liabilities were $14.735 million, including $6.697 million current payables, $1.612 million carrying value of unsecured convertible debentures, and $6.426 million derivative warrant liabilities. The warrants are expected to be settled in shares, not cash. The debentures carry 8% annual interest, mature February 2020, and are convertible at $1.90 per share; contractual cash flows shown for them total $2.303 million.
  • Other balance-sheet measures: Total assets were $22.959 million, total equity $8.224 million, and accumulated deficit $72.379 million at March 31, 2018. No dividends were declared.

Material changes and financing

  • Compared with the prior 13-month period, fiscal 2018 net loss increased by $10.257 million. Higher R&D spending, financing expenses and warrant fair-value movements were important contributors; the comparison is affected by the extra month in the prior period.
  • A December 2017 U.S. public offering generated gross proceeds of approximately $12.6 million, before costs. Its U.S.-dollar-exercise warrants are recorded as derivative liabilities and remeasured through earnings, creating non-cash earnings volatility.
  • After year-end, a May 2018 Canadian offering and full over-allotment issued approximately 10.96 million units for gross proceeds of approximately $11.5 million and net proceeds of approximately $10.0 million. Each unit included a common share and a warrant. This raised cash but increased potential dilution.
  • Common shares outstanding were 25,638,215 at March 31, 2018. The May financing materially increased the share count; the filing reports 36,628,063 shares outstanding as of the report date.

Outlook, risks and unusual items

  • Clinical and regulatory outlook: TRILOGY comprises two randomized, placebo-controlled 26-week Phase 3 studies, planned for approximately 500 severe-HTG patients across about 150 North American sites. The primary endpoint is triglyceride reduction at week 12. Management planned program completion in mid-2019 and topline results by year-end 2019; these were forward-looking targets, not guarantees. The company intended to pursue the FDA 505(b)(2) pathway and initially seek approval for severe HTG.
  • Progress reported after year-end: As of June 26, 2018, Acasti reported 110 activated sites, 463 patients enrolled and 41 randomized. Enrollment and randomization are distinct measures; verify subsequent progress and reported milestones.
  • Funding and going concern: The auditor issued an unmodified opinion but highlighted a material uncertainty that casts substantial doubt on Acasti’s ability to continue as a going concern. The company reported a history of operating losses and negative operating cash flow, no other arranged financing, and a need for further capital. Failure to secure funds or partners could delay, scale back or stop development.
  • Development and commercial risks: CaPre remained unapproved and was the company’s only prescription-drug candidate. Phase 3 results, patient recruitment, FDA acceptance of the pathway, manufacturing scale-up, cGMP compliance, reimbursement, market adoption and competitive outcomes are uncertain. Management’s Phase 2 efficacy and safety findings do not establish Phase 3 success.
  • Supply and partnership risks: Neptune discontinued krill-oil production and sold inventory and related intellectual property to Aker. Acasti said it held material intended for Phase 3 and was evaluating alternative suppliers. A non-binding term sheet with a China-based company was not a definitive commercial agreement.
  • Contingency: A former CEO claimed approximately $8.5 million and equity instruments from the Neptune group, including Acasti. Management considered the claims invalid and recorded no provision; the outcome remained uncertain.
  • Other unusual items: Fiscal 2018 included $1.134 million in transaction costs associated with derivative warrant liabilities. The company also reported foreign-exchange exposure, convertible-debenture interest, and fair-value gains or losses on warrants.

Key facts investors should verify

  • Confirm the issuer identity: the source is Acasti Pharma Inc., not Grace Therapeutics, Inc., and confirm the intended reporting period.
  • Review subsequent cash, cash burn, payables and financing needs against management’s stated runway and going-concern uncertainty.
  • Track TRILOGY enrollment, randomization, timing, safety oversight and eventual results; distinguish reported enrollment from randomized patients.
  • Verify the terms and dilution from the May 2018 financing, outstanding warrants and convertible debentures.
  • Assess the status of krill-oil supply alternatives, manufacturing scale-up, and any definitive partnership or FDA communications.
  • Follow the former CEO claim and any other litigation or contingencies, noting that no provision was recorded for the stated claim.