Acasti Pharma Inc. - Quarter Report: 2023 September (Form 10-Q)

1. Nature of operation

Acasti Pharma Inc. (“Acasti” or the “Corporation”) is incorporated under the Business Corporations Act (Québec) (formerly Part 1A of the Companies Act (Québec)). The Corporation is domiciled in Canada and its registered office is located at 2572 boul. Daniel-Johnson, 2nd Floor Laval, Québec, Canada H7T 2R3.

The Corporation’s shares are listed on the Nasdaq Capital Market (the "Nasdaq"), and through March 27, 2023 the Corporation's shares were also listed on the TSX Venture Exchange ("TSXV"), in each case, under the symbol "ACST". On March 13, 2023 the Corporation received approval to voluntarily delist from the TSXV. Effective as at the close of trading on March 27, 2023, the Corporation's common shares are no longer listed and posted for trading on the TSXV.

In August 2021, the Corporation completed the acquisition via a share-for-share merger of Grace Therapeutics, Inc. (“Grace”), a privately held emerging biopharmaceutical company focused on developing innovative drug delivery technologies for the treatment of rare and orphan diseases. The post-merger Corporation is focused on building a late-stage specialty pharmaceutical company specializing in rare and orphan diseases and developing and commercializing products that improve clinical outcomes using its novel drug delivery technologies. The Corporation seeks to apply new proprietary formulations to existing pharmaceutical compounds to achieve enhanced efficacy, faster onset of action, reduced side effects, more convenient delivery and increased patient compliance; all of which could result in improved patient outcomes. The active pharmaceutical ingredients chosen by the Corporation for further development may be already approved in the target indication or could be repurposed for use in new indications.

The Corporation has incurred operating losses and negative cash flows from operations in each year since its inception. The Corporation expects to incur significant expenses and continued operating losses for the foreseeable future.

In May 2023, the Corporation implemented a strategic realignment plan to enhance shareholder value that resulted in the Corporation engaging a new management team, streamlining its research and development activities to concentrate on its lead product, GTX-104, and greatly reducing its workforce. Moving forward, the Corporation plans to build a smaller, more focused organization in the United States. Further development of GTX-102 and GTX-101 will occur at such time as additional funding is obtained or strategic partnerships are entered into.

On September 24, 2023, the Corporation entered into a securities purchase agreement with certain institutional and accredited investors. Gross proceeds to the Corporation from this private placement were approximately $7,500, before deducting fees and expenses. The Corporation issued and sold an aggregate of 1,951,371 common shares, no par value per share, pre-funded warrants to purchase up to an aggregate of 2,106,853 common shares, each at a purchase price of $1.8481 per common share and accompanying common warrants to purchase up to an aggregate of 2,536,391 common shares. The Corporation currently intends to use the net proceeds from the private placement for clinical trial expenses to further the Phase 3 clinical trial for GTX-104, pre-commercial planning, working capital and other general corporate purposes. The Corporation believes its cash runway, including net proceeds from this financing, will be sufficient to fund the Corporation’s operations into the second calendar quarter of 2026.

The Corporation will require additional capital to fund its daily operating needs beyond that time. The Corporation does not expect to generate revenue from product sales unless and until it successfully completes drug development and obtains regulatory approval, which the Corporation expects will take several years and is subject to significant uncertainty. To date, the Corporation has financed its operations primarily through public offerings and private placements of its common shares, warrants and convertible debt and the proceeds from research tax credits. Until such time that the Corporation can generate significant revenue from drug product sales, if ever, it will require additional financing, which is expected to be sourced from a combination of public or private equity or debt financing or other non-dilutive sources, which may include fees, milestone payments and royalties from collaborations with third parties. Arrangements with collaborators or others may require the Corporation to relinquish certain rights related to its technologies or drug product candidates. Adequate additional financing may not be available to the Corporation on acceptable terms, or at all. The Corporation’s inability to raise capital as and when needed could have a negative impact on its financial condition and its ability to pursue its business strategy. The Corporation plans to raise additional capital in order to maintain adequate liquidity. Negative results from studies or trials, if any, and depressed prices of the Corporation’s stock could impact the Corporation’s ability to raise additional financing. Raising additional equity capital is subject to market conditions not within the Corporation’s control. If the Corporation is unable to raise additional funds, the Corporation may not be able to realize its assets and discharge its liabilities in the normal course of business.

The Corporation remains subject to risks similar to other development stage companies in the biopharmaceutical industry, including compliance with government regulations, protection of proprietary technology, dependence on third-party contractors and consultants and potential product liability, among others. Please refer to the risk factors included in Part 1, Item 1A of the Corporation’s Annual Report on Form 10-K for the year ended March 31, 2023, filed with the SEC on June 23, 2023 (the “Annual Report”).

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Reverse stock split

On June 29, 2023, the Board of Directors of the Corporation approved an amendment to the Corporation's Articles of Incorporation to implement a reverse stock split of the Corporation's Class A common shares, no par value per share, at a ratio of 1-for-6 (the “Reverse Stock Split”). On July 4, 2023, the Corporation filed Articles of Amendment to its Articles of Incorporation with the Registraire des entreprises du Québec, to implement the Reverse Stock Split. All references in these financial statements to number of common shares, warrants and options, price per share and weighted average number of shares outstanding have been adjusted to reflect the Reverse Stock Split, which became effective on July 10, 2023.

2. Summary of significant accounting policies:

3. Fair Value Measurements

There were no changes in valuation techniques or transfers between Levels 1, 2 or 3 during the six months ended September 30, 2023. The Corporation’s derivative warrant liabilities are measured at fair value on a recurring basis using unobservable inputs that are classified as Level 3 inputs. Refer to Note 8(b) for the valuation techniques and assumptions used in estimating the fair value of the derivative warrant liabilities.

4. Receivables

Government assistance is comprised of research and development investment tax credits from the Québec provincial government, which relate to quantifiable research and development expenditures under the applicable tax laws. The amounts recorded as receivables are subject to a government tax audit and the final amounts received may differ from those recorded. For the six months ended September 30, 2022, the Corporation recorded $81 as a reduction of research and development expenses in the Statement of Loss and Comprehensive Loss.

5. Short-term investments

7. Leases

The Corporation has historically entered into lease arrangements for its research and development and quality control laboratory facility located in Sherbrooke, Québec. As of September 30, 2023, the Corporation had one operating lease with required future minimum payments.

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On March 14, 2022, the Corporation renewed the lease agreement effective April 1, 2022, resulting in a commitment of $556 over a 24 months base lease term and 48 months additional lease renewal term. In April 2023, the Corporation elected not to renew the additional 48 months lease renewal term with the lease expected to terminate March 31, 2024. The Corporation accounted for the change in lease term as a lease modification under ASC 842. Due to the modification in lease term, the Corporation remeasured the lease liability and right-of-use asset associated with the lease. As of the effective date of modification, the Corporation recorded an adjustment to the right-of-use asset and lease liability in the amount of $369 based on the net present value of lease payments discounted using an estimated incremental borrowing rate of 4.3%.

As the Corporation's lease does not provide an implicit rate, the Corporation utilized its incremental borrowing rate to discount lease payments, which reflects the fixed rate at which the Corporation could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment.

8. Capital and other components of equity

a. Common Shares

Authorized capital stock

Unlimited number of shares

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Private Placement

On September 24, 2023, the Corporation entered into a securities purchase agreement (the “Purchase Agreement”) with certain institutional and accredited investors in connection with a private placement of the Corporation's securities (the “Offering”). Pursuant to the Purchase Agreement, the Corporation agreed to offer and sell in the Offering 1,951,371 Common Shares, at a purchase price of $1.848 per Common Share and pre-funded warrants (the “Pre-funded Warrants”) to purchase up to 2,106,853 Common Shares (the “Pre-funded Warrant Shares”) at a purchase price equal to the purchase price per Common Share less $0.0001. Each Pre-funded Warrant is exercisable for one Pre-funded Warrant Share at an exercise price of $0.0001 per Pre-funded Warrant Share, is immediately exercisable and will expire once exercised in full. Pursuant to the Purchase Agreement, the Corporation also issued to such institutional and accredited investors common warrants (the “Common Warrants” and, together with the Pre-funded Warrants, the “Warrants”) to purchase Common Shares, exercisable for an aggregate of 2,536,391 Common Shares (the “Common Warrant Shares” and, together with the Pre-Funded Warrant Shares, the “Warrant Shares”). Under the terms of the Purchase Agreement, for each Common Share and each Pre-funded Warrant issued in the Offering, an accompanying five-eighths (0.625) of a Common Warrant was issued to the purchaser thereof. Each whole Common Warrant is exercisable for one Common Warrant Share at an exercise price of $3.003 per Common Warrant Share, is immediately exercisable and will expire on the earlier of (i) the 60th day after the date of the acceptance by the U.S. Food and Drug Administration of a New Drug Application for the Corporation's product candidate GTX-104 or (ii) five years from the date of issuance. The Common Warrants were offered and sold at a purchase price of $0.125 per whole underlying Common Warrant Share, which purchase price was included in the offering price per Common Share and Pre-funded Warrant issued in the Offering.

The Offering closed on September 25, 2023 (the “Closing Date”). The net proceeds to the Corporation from the Offering was approximately $7,300, after deducting fees and expenses.

At-the-Market (“ATM”) Program

On June 29, 2020, the Corporation entered into an amended and restated sales agreement (the “Sales Agreement”) with B. Riley FBR, Inc. ("B.Riley"), Oppenheimer & Co. Inc. and H.C. Wainwright & Co., LLC (collectively, the “Agents”) to amend the Corporation’s existing ATM program. Under the terms of the Sales Agreement, which had a three-year term, the Corporation could issue and sell from time-to-time Common Shares having aggregate gross proceeds of up to $75,000 through the Agents. Subject to the terms and conditions of the Sales Agreement, the Agents would use their commercially reasonable efforts to sell the Common Shares from time to time, based upon the Corporation’s instructions. The Corporation had no obligation to sell any of the Common Shares and could, at any time, suspend sales under the Sales Agreement. The Corporation and the Agents could terminate the Sales Agreement in accordance with its terms. Under the terms of the Sales Agreement, the Corporation provided the Agents with customary indemnification rights and the Agents were entitled to compensation at a commission rate equal to 3.0% of the gross proceeds from each sale of the Common Shares. The Sales Agreement expired pursuant to its terms on June 29, 2023.

During the six months ended September 30, 2023, no Common Shares were sold under the ATM program. During the six months ended September 30, 2022, 54,108 Common Shares were sold for total net proceeds of approximately $304 with commissions, legal expenses and costs related to the share sale amounting to $10. The Common Shares were sold at the prevailing market prices, which resulted in an average price of approximately $5.70 per share.

b. Warrants

During the six-month period ended June 30, 2023, 137,370 of the May 2018 Canadian public offering warrants to acquire one common share at an exercise price of CAD $62.88 expired on May 9, 2023.

As further discussed above, on September 25, 2023, the Corporation issued an aggregate of 4,643,244 Warrants exercisable for 4,643,244 Warrant Shares in the Offering pursuant to the terms of the Purchase Agreement entered into with certain institutional and accredited investors. Pursuant to the terms of the Purchase Agreement, the Corporation sold Pre-funded Warrants to purchase up to 2,106,853 Pre-funded Warrant Shares. Each Pre-funded Warrant is exercisable for one Pre-funded Warrant Share at an exercise price of $0.0001 per Pre-funded Warrant Share, is immediately exercisable and will expire once exercised in full. Pursuant to the Purchase Agreement, the Corporation also issued to such institutional and accredited investors Common Warrants to purchase an aggregate of 2,536,391 Common Warrant Shares. Each whole Common Warrant is exercisable for one Common Warrant Share at an exercise price of $3.003 per Common Warrant Share, is immediately exercisable and will expire on the earlier of (i) the 60th day after the date of the acceptance by the U.S. Food and Drug Administration of a New Drug Application for the Corporation's product candidate GTX-104 or (ii) five years from the date of issuance.

The Common Warrants issued as a part of the Offering are derivative warrant liabilities given the warrant indenture did not meet the fixed-for-fixed criterion and that the Common Warrants are not indexed to the Corporation’s own stock. Proceeds were allocated amongst Common Shares, Pre-funded Warrants and Common Warrants by applying the residual method, with fair value of the Common Warrants determined using the Black-Scholes model, resulting in an initial warrant liability of $1,631 and $45 of issuance costs allocated to Common Warrants. Accordingly, $2,822 and $3,047 of gross proceeds were allocated to Common Shares and Pre-funded Warrants, respectively;

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and $78 and $84 of issuance costs were allocated to Common Shares and Pre-funded Warrants, respectively. For the six months ended September 30, 2023, Common Warrants were revalued at fair value through profit and loss.

The weighted average assumptions were prorated based on the probability of the warrant liability expiring on the 60th day after the date of the acceptance by the U.S. Food and Drug Administration of a New Drug Application for the Corporation's product candidate GTX-104 and of it expiring on five years from the date of issuance. The weighted average fair value of the Common Warrants were determined to be $0.64 and $1.36 per Common Warrant, as of September 25, 2023 and September 30, 2023, respectively. The risk-free interest rate at the issue date and on the reporting date of September 30, 2023 was based on the interest rate corresponding to the U.S. Treasury rate issue with a remaining term equal to the expected term of the warrants. The expected volatility was based on the historical volatility for the Company.

At September 30, 2023, the Corporation had in place a stock option plan for directors, officers, employees, and consultants of the Corporation (“Stock Option Plan”).

The Stock Option Plan provides for the granting of options to purchase common shares. Under the terms of the Stock Option Plan, the exercise price of the stock options granted under the Stock Option Plan may not be lower than the closing price of the Corporation’s common shares on the Nasdaq Capital Market at the close of such market the day preceding the grant. The maximum number of common shares that may be issued upon exercise of options granted under the amended Stock Option Plan shall not exceed 20% of the aggregate number of issued and outstanding shares of the Corporation as of July 28, 2022. The terms and conditions for acquiring and exercising options are set by the Corporation’s Board of Directors, subject to, among others, the following limitations: the term of the options cannot exceed ten years and (i) all options granted to a director will be vested evenly on a monthly basis over a period of at least twelve (12) months, and (ii) all options granted to an employee will be vested evenly on a quarterly basis over a period of at least thirty-six (36) months.

The total number of options issued to any one consultant within any twelve-month period cannot exceed 2% of the Corporation’s total issued and outstanding common shares (on a non-diluted basis). The total number of options issued within any twelve-month period to all directors, employees and/or consultants of the Corporation (or any subsidiary of the Corporation) conducting investor relations services, cannot exceed in the aggregate 2% of the Corporation’s issued and outstanding common shares (on a non-diluted basis), calculated at the date an option is granted to any such person.

The following table summarizes information about activities within the Stock Option Plan for the six-month period ended September 30, 2023:

Forfeited and cancelled options were as a result of the Corporations restructuring that occurred during the six months ended September 30, 2023. On July 14, 2023, the Corporation's Board of Directors approved the grant of 446,502 stock options at an exercise price of $2.64 under the Corporation's Stock Option Plan.