UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                 

Commission file number: 001-35776

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Acasti Pharma Inc.

(Exact name of registrant as specified in its charter)

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3009 boul. de la Concorde East, Suite 102

Laval, Québec, Canada H7E 2B5

(Address of principal executive offices, including zip code)

450-686-4555

(Registrant’s telephone number, including area code)

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Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes ☐    No  ☒

The number of outstanding common shares of the registrant, no par value per share, as of August 13, 2020 was 96,892,537.

ACASTI PHARMA INC.

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended June 30, 2020

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains information that may be forward-looking information within the meaning of Canadian securities laws and forward-looking statements within the meaning of U.S. federal securities laws, both of which we refer to in this quarterly report as forward-looking information. Forward-looking information can be identified by the use of terms such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “intend”, “estimate”, “predict”, “potential”, “continue” or other similar expressions concerning matters that are not statements about the present or historical facts. Forward-looking information in this quarterly report includes, among other things, information or statements about:

Although the forward-looking information in this quarterly report is based upon what we believe are reasonable assumptions, you should not place undue reliance on that forward-looking information since actual results may vary materially from it. Important assumptions made by us when making forward-looking statements include, among other things, assumptions by us that:

In addition, the forward-looking information in this quarterly report is subject to a number of known and unknown risks, uncertainties and other factors, including those described in our annual report on Form 10-K under the heading “Item 1A. Risk Factors”, many of which are beyond our control, that could cause our actual results and developments to differ materially from those that are disclosed in or implied by the forward-looking information, including, among others:

All of the forward-looking information in this quarterly report is qualified by this cautionary statement. There can be no guarantee that the results or developments that we anticipate will be realized or, even if substantially realized, that they will have the consequences or effects on our business, financial condition or results of operations that we anticipate. As a result, you should not place undue reliance on the forward-looking information. Except as required by applicable law, we do not undertake to update or amend any forward-looking information, whether as a result of new information, future events or otherwise. All forward-looking information is made as of the date of this quarterly report.

We express all amounts in this quarterly report in U.S. dollars, except where otherwise indicated. References to “$” and “US$” are to U.S. dollars and references to “C$” or “CAD$” are to Canadian dollars.

Except as otherwise indicated, references in this quarterly report to “Acasti,” “the Company,” “we,” “us” and “our” refer to Acasti Pharma Inc. and its consolidated subsidiaries.

PART I. FINANCIAL INFORMATION

Item 1: Financial Information

Unaudited Interim Condensed Consolidated Financial Statements

Acasti pharma INC.

Interim Condensed Consolidated Balance Sheet

(Unaudited)

See accompanying notes to unaudited interim condensed financial statements.

Acasti pharma INC.

Interim Condensed Consolidated Statements of Loss and Comprehensive Loss

(Unaudited)

Three-month periods ended June 30, 2020 and June 30, 2019

See accompanying notes to unaudited interim condensed consolidated financial statements.

Acasti pharma INC.

Interim Condensed Consolidated Statements of Changes in Shareholder’s Equity

(Unaudited)

Three-month periods ended June 30, 2020 and June 30, 2019

See accompanying notes to unaudited interim condensed consolidated financial statements.

Acasti pharma INC.

Interim Condensed Consolidated Statements of Cash Flows

(Unaudited)

Three-month periods ended June 30, 2020 and June 30, 2019

See accompanying notes to unaudited interim condensed consolidated financial statements.

Acasti pharma INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

Three-month periods ended June 30, 2020 and June 30, 2019

Acasti pharma INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

Three-month periods ended June 30, 2020 and June 30, 2019

Acasti pharma INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

Three-month periods ended June 30, 2020 and June 30, 2019

Acasti pharma INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

Three-month periods ended June 30, 2020 and June 30, 2019

Acasti pharma INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

Three-month periods ended June 30, 2020 and June 30, 2019

Acasti pharma INC.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

Three-month periods ended June 30, 2020 and June 30, 2019

This management’s discussion and analysis, or MD&A, is presented in order to provide the reader with an overview of the financial results and changes to our balance sheet as at June 30, 2020 and for the three months period then ended. This MD&A explains the material variations in our results of operations, balance sheet and cash flows for the three-month periods ended June 30, 2020 and 2019.

Market data, and certain industry data and forecasts included in this MD&A, were obtained from internal corporation surveys and market research and those conducted by third parties hired by us, publicly available information, reports of governmental agencies and industry publications, and independent third party surveys. We have relied upon industry publications as our primary sources for third-party industry data and forecasts. Industry surveys, publications and forecasts generally state that the information they contain has been obtained from sources believed to be reliable, but that the accuracy and completeness of that information is not guaranteed. We have not independently verified any of the data from third-party sources or the underlying economic assumptions they have made. Similarly, internal surveys, industry forecasts and market research, which we believe to be reliable based upon our management’s or contracted third parties’ knowledge of our industry, have not been independently verified. Our estimates involve risks and uncertainties, including assumptions that may prove not to be accurate, and these estimates and certain industry data are subject to change based on various factors, including those discussed in our most recently filed annual report on Form 10-K.

This MD&A, approved by the Board of Directors on August 13, 2020, should be read in conjunction with our unaudited condensed interim consolidated financial statements for the three-month periods ended June 30, 2020 and 2019 included in this quarterly report. Our interim financial statements were prepared in accordance with generally accepted accounting principles issued by the Financial Accounting Standards Board in the United States, or GAAP. Up to and including the third quarter ended December 31, 2019, we prepared our consolidated financial statements in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board. The comparative information in our financial statements for the three months ended June 30, 2019, has been adjusted, as necessary, to be compliant with our accounting policies under GAAP. Our financial results are now published in United States dollars. Effective March 31, 2020, the reporting currency used in the consolidated financial statements has changed from Canadian dollars to U.S. dollars. This change in reporting currency has been applied in the interim financial statements retrospectively such that all amounts expressed in our consolidated financial statements and the accompanying notes thereto are in U.S. dollars.

All amounts appearing in this MD&A for the period by period discussions are in thousands of U.S. dollars, except share and per share amounts or unless otherwise indicated.

Business Overview

We are a biopharmaceutical innovator focused on the research, development and commercialization of prescription drugs using OM3 fatty acids delivered both as free fatty acids and bound-to-phospholipid esters, derived from krill oil. OM3 fatty acids have extensive clinical evidence of safety and efficacy in lowering TGs in patients with hypertriglyceridemia, or HTG. Our lead product candidate is CaPre, an OM3 phospholipid therapeutic, which we are developing initially for the treatment of sHTG, a condition characterized by very high or severe levels of TGs in the bloodstream (≥ 500 mg/dL). In accordance with a study published in 2009 in the Archives of Internal Medicine by Ford et al., it is estimated that three to four million people in the United States have sHTG. In primary qualitative market research studies commissioned by Acasti in August 2016 and November 2017 by DP Analytics, a division of Destum Partners, and in April 2019 by another well-respected third party provider, key opinion leaders, high volume prescribers and pharmacy benefit managers who were interviewed indicated a significant unmet medical need exists for an effective, safe and well-absorbing OM3 therapeutic that can also demonstrate a positive impact on the major blood lipids associated with cardiovascular disease risk. We believe that CaPre may address this unmet medical need if our TRILOGY Phase 3 clinical program is successful in reproducing what we observed in our Phase 2 clinical data.

We also believe the potential exists to expand CaPre’s initial indication to the roughly 44.4 million patients in the United States with elevated TGs in the mild to moderate range (e.g., blood levels between 200 - 499 mg/dL), although at least one additional clinical trial would likely be required to support FDA approval of a supplemental NDA to expand CaPre’s indication to this segment. Data from our Phase 2 studies indicated that CaPre may have a positive effect in diabetes and other inflammatory and cardiometabolic diseases; consequently, we may also seek to identify new potential indications for CaPre that may be appropriate for future studies and pipeline expansion. In addition, we may also seek to in-license other cardiometabolic or other synergistic primary care-focused drug candidates for drug development and commercialization.

In four clinical trials conducted to date, we saw the following consistent results with CaPre, and we are seeking to demonstrate similar safety and efficacy in our TRILOGY Phase 3 program:

We believe that if we are able to reproduce these results in our TRILOGY Phase 3 program, that this could potentially set CaPre apart from current FDA-approved fish oil-derived OM3 treatment options, and it could give us a significant clinical and marketing advantage.

TRILOGY 1 Topline Results

Our first Phase 3 clinical trial, designated as TRILOGY 1, was conducted exclusively in the United States and was fully randomized with a final total of 242 patients. On January 13, 2020, we released topline results for TRILOGY 1, which, despite meaningful TG-lowering in the CaPre arm of the study, did not reach statistical significance due to an unusually large placebo effect. The observed reductions in TG levels in the TRILOGY 1 placebo group were far greater than that seen in any previous TG-lowering trial with a prescription OM3. As previously disclosed, we, along with the academic principal investigator of the trial, Dariush Mozaffarian, M.D., Dr.P.H., and external clinical and statistical experts, conducted rigorous post-hoc analysis of TRILOGY 1 data. This analysis revealed a rapid, significant and sustained reduction in TG levels between screening (during qualification) and the time of patient randomization (prior to patients starting on either drug or placebo), which we refer to as “Pre-randomization Triglyceride Normalization.” This artefactual phenomenon affected both treatment groups, but was much greater in the placebo group, resulting in the large placebo effect and significant underestimation of the post-randomization treatment effect of the active drug, CaPre. The post-hoc analyses of the primary endpoint using a revised, single point baseline value from Week 0 (Visit 4) corrected for a significant amount of the pre-randomization TG reduction in subjects that were most affected by the normalization phenomenon, and a meaningful efficacy trend for CaPre was observed.

Recent Developments

As we have previously disclosed, we filed a Type C meeting request at the end of March 2020 with the FDA. We subsequently submitted our briefing package on April 29, 2020 to the FDA. The briefing package intended to provide the FDA with a review of the relevant TRILOGY 1 clinical data and audit findings, with the objective of gaining alignment on the interpretation of the TRILOGY 1 results and implications for TRILOGY 2. We also sought the FDA’s input on our proposed revisions to the pre-specified TRILOGY 2 Statistical Analysis Plan, or SAP, and their input on a plan for pooling the data from TRILOGY 1 and TRILOGY 2 to support an NDA filing.

On June 19, 2020, we announced that the FDA had provided us with a written response to our meeting request and briefing package. The FDA confirmed that it will require pivotal efficacy analyses to be performed on the full Intent to Treat population as contemplated in the original SAP, and they supported the conduct of post-hoc analyses in TRILOGY 1 for exploratory purposes. Consistent with our prior disclosures and depending on the outcome of TRILOGY 2, an additional clinical study may still be needed prior to an NDA submission.

Based on the written feedback received from the FDA, and working with the academic principal investigator of our TRILOGY Phase 3 clinical program, Dariush Mozaffarian, M.D., Dr.P.H., and other key advisors, we finalized the SAP for TRILOGY 2 and submitted it to the FDA as planned on July 31, 2020. We continue to remain blinded to the TRILOGY 2 clinical data and we continue to expect to report topline data from TRILOGY 2 on or about August 31, 2020. We expect to provide an update on the timing to report the key secondary and exploratory endpoints from both TRILOGY 1 and TRILOGY 2 trials and pooled results from both studies sometime after TRILOGY 2 results are reported.

On April 30, 2020, we also announced that we had received notice of issuance of a composition of matter patent awarded by the Intellectual Property Office in Hong Kong. This new patent expands our intellectual property portfolio by granting claims for any composition containing eicosapentaenoic acid and docosahexaenoic acid, where at least 50% of the composition consists of phospholipids.

COVID-19 Update

To date, the ongoing COVID-19 pandemic has not caused significant disruptions to our business operations and research and development activities. In January 2020, before the COVID-19 pandemic started to have a widespread impact in North America, the last patient completed their final visit to our TRILOGY 2 Phase 3 trial. However, in light of our plan to raise additional capital (dilutive or non-dilutive) to fully execute our business plan, a continuation of the COVID-19 pandemic and any resulting volatility generally in the capital markets could adversely impact our ability to access capital on terms acceptable to us or at all. In addition, a continuation of the COVID-19 pandemic in North America could negatively affect our ability to conduct any additional clinical work, if it is required.

The extent to which the COVID-19 pandemic impacts our business and prospects will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and the actions to contain the COVID-19 pandemic or treat its impact, among others.

Caution Regarding Non-GAAP Financial Measures

We use multiple financial measures for the review of our operating performance. These measures are generally GAAP financial measures, but one adjusted financial measure, non-GAAP operating loss, is also used to assess our operating performance. This non-GAAP financial measure is directly derived from our financial statements and is presented in a consistent manner. We use this measure, in addition to the GAAP financial measures, for the purposes of evaluating our historical and prospective financial performance, as well as our performance relative to competitors and to plan and forecast future periods as well as to make operational and strategic decisions. We believe that providing this non-GAAP information to investors, in addition to GAAP measures, allows them to see our results through the eyes of management, and to better understand our historical and future financial performance.

Earnings and other measures adjusted to a basis other than GAAP do not have standardized meanings and are unlikely to be comparable to similar measures used by other companies. Accordingly, they should not be considered in isolation. We use non-GAAP operating loss to measure our performance from one period to the next without the variation caused by certain adjustments that could potentially distort the analysis of trends in our operating performance, and because we believe it provides meaningful information on our financial condition and operating results. Our method for calculating non-GAAP operating loss may differ from that used by other companies.

We calculate our non-GAAP operating loss by adding to net loss our finance expenses (which includes change in fair value of derivative warrant liabilities, foreign exchange gain (loss), interest expense and accretion on convertible debentures, and transaction costs related to derivative warrant liabilities, net of interest income) depreciation and amortization, impairment loss, litigation settlement that was settled via the issuance of common shares, and stock-based compensation, and by subtracting deferred tax recovery. Items that do not impact our core operating performance are excluded from the calculation as they may vary significantly from one period to another. We also exclude the effects of certain non-monetary transactions recorded, such as stock-based compensation and litigation settlement that was settled via the issuance common shares, from our non-GAAP operating loss calculation. Excluding these items does not imply they are necessarily non-recurring.

A reconciliation of net loss to non-GAAP operating loss is presented later in this MD&A.

Basis of Presentation of the Financial Statements

Our consolidated financial statements, which include the accounts of our wholly owned subsidiary, Acasti Innovations AG, have been prepared in accordance with GAAP, and the rules and regulations of the U.S. Securities and Exchange Commission, or the SEC, related to interim reports filed on Form 10-Q. All intercompany transactions and balances are eliminated on consolidation.

Going Concern Uncertainty

The following summarizes the principal conditions or events relevant to our going concern assessment, which primarily considers the period of one year from the issuance date of our consolidated financial statements. We have incurred operating losses and negative cash flows from operations since our inception. Our current assets of $14.0 million as at June 30, 2020 include cash and cash equivalents totaling $12.1 million. Our current liabilities total $6.0 million at June 30, 2020 and are comprised primarily of amounts due to or accrued for creditors. Management projects that assuming positive results from our TRILOGY Phase 3 program, additional funds will be needed in the future for us to file an NDA, to obtain FDA approval for CaPre in the United States, to further scale-up our manufacturing capabilities, and to complete market development and other pre-commercialization activities. Our plans include raising additional capital through additional securities offerings, as well as non-dilutive sources of capital such as grants or loans and strategic alliances, but there can be no assurance as to when or whether we will complete any financings or strategic alliances. In particular, raising additional equity capital is subject to market conditions not within our control. If we do not raise additional funds or find one or more strategic partners, we may not be able to realize our assets and discharge our liabilities in the normal course of business. We have no arranged sources of financing currently other than our “At-the-Market” sales agreement which provides for only conditional selling of our common shares.

As a result, there is a substantial doubt about our ability to continue as a going concern. Our consolidated financial statements have been prepared on a going concern basis, which assumes we will continue our operations in the foreseeable future and will be able to realize our assets and discharge our liabilities and commitments in the ordinary course of business. These consolidated financial statements do not include any adjustments to the carrying values and classification of assets and liabilities and reported expenses that might result from the outcome of this uncertainty and that may be necessary if the going concern basis was not appropriate for these consolidated financial statements. If we were unable to continue as a going concern, material impairment of the carrying values of our assets, including the intangible asset, could be required.

Comparative Financial Information for the Three-Month Periods Ended June 30, 2020 and 2019

Reconciliation of Net Loss to Non-GAAP Operating Loss

Results of Operations for the Three-Month Periods Ended June 30, 2020 and 2019

The net loss of $4,666 or $0.05 per share for the three months ended June 30, 2020 decreased by $4,180 from the net loss $8,846 or $0.11 per share for the three months ended June 30, 2019.

The reduction in net loss, resulted primarily from the decrease in research and development expenses of $4,434 as the TRILOGY Phase 3 clinical program for CaPre moved closer to completion. In addition, net financial expenses decreased to $545 for the three months ended June 30, 2020, as compared to net financial expenses of $840 for the three months ended March 31, 2019, due mostly to a lower change in fair value of the derivative warrant liability in the first fiscal quarter in 2020 as compared to the comparative fiscal quarter in 2019 caused by a proportionately higher increase in the quarter over quarter closing share price partly offset by a reduction in the number of warrants outstanding due to exercises during the prior year. Sales and marketing expenses also decreased as a as a result of a planned delay in pre-launch marketing activities until the results of the TRILOGY 2 Phase 3 clinical trial are obtained.

In contrast, general and administrative expenses increased due to higher consulting, accounting and legal fees incurred in connection with the conversion of the financial statements from IFRS to GAAP.

Stock-based compensation expense increased to $632 for the three-month period ended June 30, 2020, as compared to $250 for the three-month period ended June 30, 2019. The increased expense of $382 is the result of 6.1 million stock options granted to existing and new employees and directors during the fiscal year ended March 31, 2020, partially offset by stock options exercised, forfeited and expired. Moreover, the weighted average fair value of the options granted to employees and directors during the fiscal year ended March 31, 2020 was CAD$0.85 compared to CAD$0.51 for the fiscal year ended March 31, 2019 grants.

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¹ The Non-GAAP operating loss is not a standard measure endorsed by GAAP requirements. A reconciliation to our net loss is presented in this MD&A.

² Working capital is calculated by subtracting current liabilities from current assets. Because there is no standard method endorsed by GAAP requirements, the results may not be comparable to similar measurements presented by other public companies.

The depreciation and amortization expense remained relatively constant.

Two separate derivative warrant liabilities are included in the statement of financial position as at June 30, 2020, and June 30, 2019. These derivative warrant liabilities stem from the financing transactions that took place in May 2018 and December 2017. The derivative warrant liabilities are re-measured to fair value at each reporting date using the Black-Scholes option pricing model. The valuations are mainly driven by the fluctuation in our share price resulting in an increased or decreased loss or gain related to the change in fair value of the warrant liabilities and increasing or decreasing the corresponding liability in the balance sheet.

Breakdown of Major Components of the Statement of Loss and Comprehensive Loss

Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019

During the three months ended June 30, 2020, we continued to advance the TRILOGY Phase 3 clinical program for CaPre in partnership with one of the world’s largest providers of biopharmaceutical development and clinical outsourcing services. Research and development expenses before depreciation, amortization and stock-based compensation expense for the three months ended June 30, 2020 totaled $1,070 compared to $5,542 for the three months ended June 30, 2019. The net decrease was mainly attributable to a reduction in research contracts expense due to the advancement of the Phase 3 clinical program, as it moved closer to completion.

General and administrative expenses totaled $1,301 before stock-based compensation expense for the three months ended June 30, 2020 and increased by $333 from $968 for the three months ended June 30, 2019. The increase was mainly attributable to consulting, accounting and legal fees in connection with the conversion from IFRS to U.S. GAAP.

Sales and marketing expenses were $573 before stock-based compensation expense for the three months ended June 30, 2020 compared to $677 for the three months ended June 30, 2019. The decrease was mostly due to a reduction in professional fees as a result of a planned delay in pre-launch marketing activities until the results of the TRILOGY 2 Phase 3 clinical trial are obtained. The decrease was partially offset by an increase in salaries and benefits as a result of headcount added in 2019 to the commercial team to support expanded business and market development activities.

Liquidity and Capital Resources

Share Capital Structure

Our authorized share capital consists of an unlimited number of Class A, Class B, Class C, Class D and Class E shares, without par value. Issued and outstanding fully paid shares, stock options, restricted shares units and warrants, were as follows for the periods ended:

Cash Flows and Financial Condition Between the Three Months Ended June 30, 2020 and 2019

Summary

As at June 30, 2020, cash and cash equivalents totaled $12,122, a net decrease of $3,855 compared to cash and cash equivalents totaling $15,977 at June 30, 2019.

Operating activities

During the three months ended June 30, 2020 and June 30, 2019, our operating activities used cash of $4,309 and $6,824, respectively. The decrease of $2,515 during the three months ended June 30, 2020, was due to the reduction of spending as the TRILOGY Phase 3 clinical trials were nearing completion, partly offset by the timing of payment of invoices.

We expect that additional time and capital will be required by us to file an NDA to obtain FDA approval for CaPre in the United States, to further scale-up our manufacturing capabilities, and to complete marketing and other pre-commercialization activities, if our TRILOGY Phase 3 program is successful and we can proceed to file an NDA. Consequently, we expect to require additional capital to fund our daily operating needs beyond the next fiscal year-end. Based on a conservative estimate, we believe that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements through the first calendar quarter of 2021. To fully execute our business plan, we plan to raise the necessary capital primarily through additional securities offerings and multiple sources of non-dilutive capital such as grants or loans and strategic alliances. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay the commercial launch of CaPre. Negative or inconclusive results in our TRILOGY Phase 3 clinical program for CaPre may adversely affect our ability to raise additional capital and/or to complete strategic commercialization partnerships to support the commercial launch of CaPre. Additional funding from third parties may not be available on acceptable terms or at all to enable us to continue with the commercialization of CaPre.

Investing activities

During the three months ended June 30, 2020, we used cash of $36 to acquire equipment to reinforce our IT infrastructure. During the three months ended June 30, 2019, we generated cash of $5,518 due primarily to the maturity of marketable securities.

Financing activities

During the three-month period ended June 30, 2020, we generated cash of $1,775 due to the net proceeds from the sale of shares under the “at-the-market”, or ATM, program.

During the three months ended June 30, 2019, our financing activities generated $34 due to the exercise of warrants.

On June 29, 2020, we filed a registration statement on Form S-3 with the SEC to register up to US$200 million of common shares, warrants and units that may be offered and sold by us from time to time. The Registration Statement was declared effective by the SEC on July 7, 2020.

ATM program

On February 14, 2019, we entered into an ATM sales agreement with B. Riley FBR, Inc. (“B. Riley”) pursuant to which our common shares may be sold from time to time for aggregate gross proceeds of up to $30 million, with sales only being made on the NASDAQ Stock Market. The common shares would be issued at market prices prevailing at the time of the sale and, as a result, prices may vary between purchasers and during the period of distribution. The ATM program has a 3-year term and requires us to pay between 3% and 4% commission to B. Riley based on volume of sales made.

During the three-month period ended June 30, 2020, a total of 2.3 million common shares were sold for total net proceeds of approximately $1.8 million under the ATM program. The shares were sold at the prevailing market prices, which resulted in an average price of approximately $0.81 per share. Accordingly, proportional costs of $10 related to the common shares sold have been reclassified from deferred financings costs to equity.

On June 29, 2020, we entered into an amended and restated sales agreement, or the Sales Agreement, with B. Riley, Oppenheimer & Co. Inc. and H.C. Wainwright & Co., LLC, or collectively the Agents, to amend the existing ATM program. Under the terms of the Sales Agreement, we may issue and sell from time to time common shares, , having an aggregate offering price of up to $75 million through the Agents.

Subject to the terms and conditions of the Sales Agreement, the Agents will use their commercially reasonable efforts to sell the common shares from time to time, based upon our instructions. We have no obligation to sell any of the common shares and may at any time suspend sales under the Sales Agreement or terminate the Sales Agreement in accordance with its terms. Under the terms of the Sales Agreement, we provided the Agents with customary indemnification rights and the Agents will be entitled to compensation, at a commission rate equal to 3.0% of the gross proceeds from each sale of common shares.

There are several conditions that must be met in order for us to use the ATM, and the program only commits the Agents to use commercially reasonable efforts, and thus is not a guaranteed source of financing. Further, the ATM may be cancelled by the Agents at their sole discretion at any time with 5 days’ notice. In the event that we are unable to use our ATM, we would have to rely on other financing approaches and sources to obtain additional new funding.

Costs incurred to register the Sales Agreement amounted to $130 and were recorded as deferred financing costs in the Consolidated Balance Sheet. Accordingly, the remaining balance of the costs incurred during February 2019 for an amount of $115 were written off to financing expenses.

Transactions Subsequent to June 30, 2020

ATM Program

Subsequent to June 30, 2020, we sold a total of 4,404,152 common shares through the ATM program, for net proceeds of approximately $3.4 million (net of commissions paid for approximately $0.1 million). The shares were sold at the prevailing market prices which resulted in an average price of approximately $0.80 per share.

Financial Position

The following table details the significant changes to the statements of financial position as at June 30, 2020 compared to the prior fiscal year end at March 31, 2020:

See the statement of changes in equity in our financial statements for details of changes to the equity accounts during the three-month periods ended June 30, 2020 and 2019.

Treasury Operations

Our treasury policy is to invest cash that is not required immediately, into instruments with an investment strategy based on capital preservation. Cash equivalents and marketable securities are primarily made in guaranteed investment certificates, term deposits and high-interest savings accounts, which are issued and held with Canadian chartered banks, highly rated promissory notes issued by government bodies and commercial paper. We hold cash denominated in both U.S. and CAD dollars. Funds received in U.S. dollars from equity financings are invested as per our treasury policy in U.S. dollar investments and converted to CAD dollars as needed to fulfill operational requirements and funding. 

Derivative Warrant Liabilities

A total of 10,188,100 warrants were issued as part of our May 2018 public offering in Canada and recognized as derivative warrant liabilities with a fair value at inception of $3,323. During the year ended March 31, 2020, a total of 3,594,350 warrants were exercised. As of June 30, 2020, the derivative warrant liability for the remaining 6,593,750 warrants totaled $1,604, which represents the fair value of these warrants as at June 30, 2020. The weighted average fair value of the warrants issued in the May 2018 public offering in Canada was determined to be CAD$0.39 per warrant at inception and approximately CAD$0.33 (US $0.23) per warrant as at June 30, 2020. 

On December 27, 2017, 9,801,861 warrants were issued as part of our U.S. public offering and recognized as derivative warrant liabilities with a fair value at inception of $4,548. The December 2017 warrants are derivative warrant liabilities for accounting purposes due to the currency of the exercise price (US$) being different from our Canadian dollar functional currency. During the year ended March 31, 2020, 2,728,899 warrants were exercised (including 52,288 warrants exercised on a cashless basis). As of June 30, 2020, the derivative warrant liability for the remaining 7,072,962 warrants totaled $1,467, which represents the fair value of these warrants as at June 30, 2020. The weighted average fair value of the 2017 warrants issued was determined to be CAD$0.60 per warrant at inception and approximately CAD$0.28 (US $0.21) per warrant as at June 30, 2020.

The variance in the fair value of both existing derivative warrant liabilities as at June 30, 2020 is mostly due to the fluctuations in our share price and the dilution factor.

Contractual Obligations and Commitments

As at June 30, 2020, our liabilities totaled $9,106, of which $5,979 was due within 1 year, and $3,071 related to derivative warrant liabilities that are expected to be settled in common shares.

A summary of the contractual obligations at June 30, 2020, is as follows:

Lease

On March 5, 2020, we renewed the lease agreement for our research and development and quality control laboratory facility located in Sherbrooke, Québec, resulting in an obligation of $160 over 24 months of the lease term. As at June 30, 2020, the remaining balance of the commitment amounted to $140.

RKO supply agreement

On October 25, 2019, we signed a supply agreement with Aker, to purchase RKO for a committed volume of commercial starting material for CaPre at a fixed price for a total value of $3.1 million (take or pay). The delivery of the RKO has been established following a calendar year basis and it is expected to be completed in the 4^th calendar quarter of 2021. As at June 30, 2020, the remaining balance of the commitment with Aker amounts to $2.8 million.

Research and development contracts and contract research organizations agreements

We utilize contract manufacturing organizations, for the development and production of clinical materials and contract research organizations to perform services related to our clinical trials. Pursuant to the agreements with these contract manufacturing organizations and contract research organizations, we have either the right to terminate the agreements without penalties or under certain penalty conditions.

Contingencies

We evaluate contingencies on an ongoing basis and establish loss provisions for matters in which losses are probable and the amount of the loss can be reasonably estimated.

On May 10, 2019, we announced the settlement regarding legal claims made by our former chief executive officer with respect to the termination of his employment. Pursuant to the settlement agreement, we agreed to issue 900,000 common shares valued at CAD$1.10 per share to our former CEO. In addition, we agreed to reimburse the former CEO for legal fees of $48. Pursuant to the settlement agreement, we received a full and final release from the former CEO on all procedures in connection with the termination of his employment. This settlement was accrued as a short-term liability as at March 31, 2019 and the expense of $790 was included as part of general and administrative expenses. The case is closed, and no further costs are expected.

Off-Balance Sheet Arrangements

As of the date of this quarterly report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Use of estimates and measurement of uncertainty

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates are based on management’s best knowledge of current events and actions that management may undertake in the future. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

Estimates and assumptions include the measurement of derivative warrant liabilities and stock-based compensation. Estimates and assumptions are also involved in measuring the accrual of services rendered with respect to research and developments expenditures at each reporting date, are determining which research and development expenses qualify for research and development tax credits and in what amounts. We recognize the tax credits once it has reasonable assurance that they will be realized. Recorded tax credits are subject to review and approval by tax authorities and, therefore, could be different from the amounts recorded.

Critical Accounting Policies

Derivative warrant liabilities

The warrants forming part of the units issued in the May 2018 Canadian public offering are derivative liabilities for accounting purposes given the fact that the warrant indenture contains certain contingent provisions that allow for cash settlement. The warrants forming part of the units issued from the December 2017 U.S. public offering are derivative liabilities for accounting purposes due to the currency of the exercise price being different from our functional currency. The derivative warrant liabilities are required to be measured at fair value at each reporting date with changes in fair value recognized in earnings. We use the Black-Scholes pricing model to determine the fair value. The model requires the assumption of future stock price volatility, which is estimated based on weighted average historic volatility. Changes to the expected volatility could cause significant variations in the estimated fair value of the derivative warrant liabilities.

Stock-based compensation

We have a stock-based compensation plan, which is described in note 15 of the annual consolidated financial statements and note 8 to the interim financial statements. We account for stock options granted to employees based on the fair value method, with fair value determined using the Black-Scholes model. The Black Scholes model requires certain assumptions such as future stock price volatility and expected life of the instrument. Expected volatility is estimated based on weighted average historic volatility. The expected life of the instrument is estimated based on the average of the vesting and contractual periods for employee awards as there is minimal prior exercises of options in which to establish historical exercise experience; and contractual life is used for broker warrants. Under the fair value method, compensation cost is measured at fair value at date of grant and is expensed over the award’s vesting period with a corresponding increase in additional paid-in capital. For stock options granted to non-employees, we measure the grant-date fair value based on the equity instruments issued. Compensation cost is measured when we obtain the goods, or the counterparty renders the service.

Financial Instruments

Credit risk

Credit risk is the risk of a loss if a customer or counterparty to a financial asset fails to meet its contractual obligations. We have credit risk relating to cash, cash equivalents and marketable securities, which we manage by dealing only with highly rated Canadian financial institutions. The carrying amount of financial assets, as disclosed in the statements of financial position, represents our credit exposure at the reporting date.

Currency risk

We are exposed to the financial risk related to the fluctuation of foreign exchange rates and the degrees of volatility of those rates. Foreign currency risk is limited to the portion of our business transactions denominated in currencies other than the Canadian dollar. Fluctuations related to foreign exchange rates could cause unforeseen fluctuations in our operating results.

A portion of the expenses, mainly related to research contracts and purchase of production equipment, is incurred in U.S. dollars and in Euros, for which no financial hedging is required. There is a financial risk related to the fluctuation in the value of the U.S. dollar and the Euro in relation to the Canadian dollar. In order to minimize the financial risk related to the fluctuation in the value of the U.S. dollar in relation to the Canadian dollar, funds which were part of U.S. dollar financings continue to be invested as short-term investments in the U.S. dollar.

Furthermore, a portion of our cash and cash equivalents and marketable securities are denominated in U.S. dollars, further exposing us to fluctuations in the value of the U.S. dollar in relation to the Canadian dollar.

The following table provides an indication of our significant foreign exchange currency exposures as stated in Canadian dollars at the following dates:

The following exchange rates are those applicable to the following periods and dates:

Based on our foreign currency exposures noted above, varying the above foreign exchange rates to reflect a 5% strengthening of the U.S. dollar and Euro would have an increase (decrease) in net loss as follows, assuming that all other variables remain constant:

An assumed 5% weakening of the foreign currencies would have an equal but opposite effect on the basis that all other variables remained constant.

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market rates.

Our exposure to interest rate risk as at June 30, 2020 and June 30, 2019 was as follows:

Our capacity to reinvest the short-term amounts with equivalent return will be impacted by variations in short-term fixed interest rates available on the market. Management believes the risk we will realize a loss as a result of the decline in the fair value of our short-term investments is limited because these investments have short-term maturities and are held to maturity.

Liquidity risk

Liquidity risk is the risk that we will not be able to meet our financial obligations as they fall due. We manage liquidity risk through the management of our capital structure and financial leverage. We also manage liquidity risk by continuously monitoring actual and projected cash flows. The Board of Directors reviews and approves our operating budgets and reviews material transactions outside the normal course of business.

Our contractual obligations related to financial instruments and other obligations and liquidity resources are presented in the liquidity and capital resources of this MD&A. See also “Note 2 - Going Concern Uncertainty” to the consolidated financial statements.

Future Accounting Changes

The following new standards, and amendments to standards and interpretations, are not yet effective for the period ended June 30, 2020, and have not been applied in preparing our consolidated financial statements.

In June 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-13-Financial Instruments-Credit Losses (Topic 326), which amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost, the new guidance eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. ASU 2016-13 will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2022. Management has not yet evaluated the impact of this ASU on the consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15-Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs in such cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and early adoption is permitted. Entities can choose to adopt the new guidance prospectively or retrospectively. Management has adopted the accounting standard update. However, the adoption of this update did not have any impact on the reported amounts as at June 30, 2020.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Information relating to quantitative and qualitative disclosures about market risks is detailed in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report, our management, with the participation of our Chief Executive Officer, or the CEO, and Vice President Finance, has performed an evaluation of the effectiveness of our disclosure controls and procedures within the meaning of Rules 13a-15 (e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based upon this evaluation, our management has concluded that, as of June 30, 2020, our existing disclosure controls and procedures were effective. It should be noted that while the CEO and Vice President Finance believe that our disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect the disclosure controls and procedures to be capable of preventing all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Changes in Internal Control over Financial Reporting

No changes were made to our internal controls over financial reporting that occurred during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. As of June 30, 2020, we are not a party to any legal proceedings that, in the opinion of our management, would reasonably be expected to have a material adverse effect on our business, financial condition, operating results or cash flows if determined adversely to us. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in our most recently filed annual report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: August 13, 2020

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