Grace Therapeutics, Inc. 10-K

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Market Information Our common shares are traded on The Nasdaq Capital Market under the symbol “ACST.” Holders As of June 23, 2023, there were 40 holders of record of our common shares. The actual number of our shareholders is greater than this number of record holders because most of our shareholders are beneficial owners whose shares are held in street name by brokers and other nominees. Dividends We do not anticipate paying any cash dividend on our common shares in the foreseeable future. We presently intend to retain any future earnings to finance the expansion and growth of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors the board of directors deems relevant. In addition, the terms of any future debt or credit facility may preclude us from paying dividends. Taxation The following is a summary of certain U.S. federal income tax considerations arising from and relating to the acquisition, ownership, and disposition of our common shares to a U.S. Holder (as defined below) as capital assets. This summary provides only general information and does not purport to be a complete analysis or listing of all potential U.S. federal income tax consequences that may apply to a U.S. Holder as a result of the acquisition, ownership, and disposition of our common shares. In addition, this summary does not take into account the individual facts and circumstances of any particular U.S. Holder that may affect the U.S. federal income tax consequences applicable to that U.S. Holder. Accordingly, this summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice with respect to any U.S. Holder. Each U.S. Holder should consult its own tax advisor regarding the U.S. federal, state and local, and non-U.S. tax consequences arising from or relating to the acquisition, ownership, and disposition of our common shares. No legal opinion from U.S. legal counsel or ruling from the IRS, has been requested, or will be obtained, regarding the U.S. federal income tax consequences to U.S. Holders of the acquisition, ownership, and disposition of our common shares. This summary is not binding on the IRS, and the IRS is not precluded from taking a position that is different from, and contrary to, the positions taken in this summary. In addition, because the authorities on which this summary is based are subject to various interpretations, the IRS and the U.S. courts could disagree with one or more of the positions taken in this summary. Scope of this Disclosure Authorities This summary is based on the Code, U.S. Treasury Regulations promulgated thereunder (whether final, temporary or proposed), published IRS rulings, judicial decisions, published administrative positions of the IRS, and the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital, signed September 26, 1980, as amended (the Canada-U.S. Tax Treaty), in each case, as in effect as of the date of this report. Any of the authorities on which this summary is based could be changed in a material and adverse manner at any time, and any such change could be applied on a retroactive basis. Unless otherwise discussed, this summary does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation. U.S. Holders For purposes of this summary, a “U.S. Holder” is a beneficial owner of common shares that, for U.S. federal income tax purposes, is (a) an individual who is a citizen or resident of the United States, (b) a corporation, or other entity classified as a corporation for U.S. federal income tax purposes, that is created or organized in or under the laws of the U.S., any state in the United States or the District of Columbia, (c) an estate if the income of such estate is subject to U.S. federal income tax regardless of the source of such income, or (d) a trust if (i) such trust has validly elected to be treated as a U.S. person for U.S. federal income tax purposes or (ii) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of such trust. U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not Addressed This summary does not address the U.S. federal income tax consequences applicable to U.S. Holders that are subject to special provisions under the Code, including, but not limited to, the following U.S. Holders: (a) U.S. Holders that are tax-exempt organizations, qualified retirement plans, individual retirement accounts, or other tax deferred accounts; (b) U.S. Holders that are financial institutions, insurance companies, real estate investment trusts, or regulated investment companies; (c) U.S. Holders that are dealers in securities or currencies or U.S. Holders that are traders in securities that elect to apply a mark-to-market accounting method; (d) U.S. Holders that have a “functional currency” other than the U.S. dollar; (e) U.S. Holders subject to the alternative minimum tax provisions of the Code; (f) U.S. Holders that own common shares as part of a straddle, hedging transaction, conversion transaction, integrated transaction, constructive sale, or other arrangement involving more than one position; (g) U.S. Holders that acquired common shares through the exercise of employee stock options or otherwise as compensation for services; (h) U.S. Holders that hold common shares other than as a capital asset within the meaning of Section 1221 of the Code; (i) U.S. Holders that beneficially own (directly, indirectly or by attribution) 10% or more of our equity securities (by vote or value); and (j) U.S. expatriates. U.S. Holders that are subject to special provisions under the Code, including U.S. Holders described above, should consult their own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences arising from and relating to the acquisition, ownership, and disposition of the common shares. If an entity or arrangement that is classified as a partnership for U.S. federal income tax purposes holds common shares, the U.S. federal income tax consequences to that partnership and the partners of that partnership generally will depend on the activities of the partnership and the status of the partners. Partners of entities that are classified as partnerships for U.S. federal income tax purposes should consult their own tax advisors regarding the U.S. federal income tax consequences arising from and relating to the acquisition, ownership and disposition of the common shares. Tax Consequences Other than U.S. Federal Income Tax Consequences Not Addressed This summary does not address the U.S. estate and gift, alternative minimum, state, local or non-U.S. tax consequences to U.S. Holders of the acquisition, ownership, and disposition of our common shares. Each U.S. Holder should consult its own tax advisor regarding the U.S. estate and gift, alternative minimum, state, local and non-U.S. tax consequences arising from and relating to the acquisition, ownership, and disposition of our common shares. 37 U.S. Federal Income Tax Considerations of the Acquisition, Ownership, and Disposition of Common Shares Distributions on Common Shares Subject to the discussion under “—Passive Foreign Investment Company Rules” below, a U.S. Holder that receives a distribution, including a constructive distribution or a taxable stock distribution, with respect to the common shares generally will be required to include the amount of that distribution in gross income as a dividend (without reduction for any Canadian income tax withheld from such distribution) to the extent of our current or accumulated “earnings and profits” (as computed for U.S. federal income tax purposes). To the extent that a distribution exceeds our current and accumulated “earnings and profits”, the excess amount will be treated (a) first, as a tax-free return of capital to the extent of a U.S. Holder’s adjusted tax basis in the common shares with respect to which the distribution is made (resulting in a corresponding reduction in the tax basis of those common shares) and, (b) thereafter, as gain from the sale or exchange of those common shares (see the more detailed discussion at “—Disposition of Common Shares” below). We do not intend to calculate our current or accumulated earnings and profits for U.S. federal income tax purposes and, therefore, will not be able to provide U.S. Holders with that information. U.S. Holders should therefore assume that any distribution by us with respect to our common shares will constitute a dividend. However, U.S. Holders should consult their own tax advisors regarding whether distributions from us should be treated as dividends for U.S. federal income tax purposes. Dividends paid on our common shares generally will not be eligible for the “dividends received deduction” allowed to corporations under the Code with respect to dividends received from U.S. corporations. A dividend paid by us generally will be taxed at the preferential tax rates applicable to long-term capital gains if, among other requirements, (a) we are a “qualified foreign corporation” (as defined below), (b) the U.S. Holder receiving the dividend is an individual, estate, or trust, and (c) the dividend is paid on common shares that have been held by the U.S. Holder for at least 61 days during the 121-day period beginning 60 days before the “ex-dividend date” (i.e., the first date that a purchaser of the common shares will not be entitled to receive the dividend). For purposes of the rules described in the preceding paragraph, we generally will be a “qualified foreign corporation”, or a QFC, if (a) we are eligible for the benefits of the Canada-U.S. Tax Treaty, or (b) our common shares are readily tradable on an established securities market in the United States, within the meaning provided in the Code. However, even if we satisfy one or more of the requirements, we will not be treated as a QFC if we are classified as a PFIC (as discussed below) for the taxable year during which we pay the applicable dividend or for the preceding taxable year. The dividend rules are complex, and each U.S. Holder should consult its own tax advisor regarding the application of those rules to them in their particular circumstances. Even if we satisfy one or more of the requirements, as noted below. Thus, there can be no assurance that we will qualify as a QFC. Disposition of Common Shares Subject to the discussion under “—Passive Foreign Investment Company Rules” below, a U.S. Holder will recognize gain or loss on the sale or other taxable disposition of common shares (that is treated as a sale or exchange for U.S. federal income tax purposes) equal to the difference, if any, between (a) the U.S. dollar value of the amount realized on the date of the sale or disposition and (b) the U.S. Holder’s adjusted tax basis (determined in U.S. dollars) in the common shares sold or otherwise disposed of. Any such gain or loss generally will be capital gain or loss, which will be long-term capital gain or loss if the common shares are held for more than one year. A U.S. Holder's initial tax basis in the common shares generally will equal the U.S. dollar cost of such common shares. Each U.S. Holder should consult its own tax advisor as to the tax treatment of dispositions of common shares in exchange for Canadian dollars. Preferential tax rates apply to long-term capital gains of a U.S. Holder that is an individual, estate, or trust. There are currently no preferential tax rates for long-term capital gains of a U.S. Holder that is a corporation. Deductions for capital losses are subject to complex limitations. Passive Foreign Investment Company Rules If we are or become a PFIC, the preceding sections of this summary may not describe the U.S. federal income tax consequences to U.S. Holders of the acquisition, ownership, and disposition of our common shares. Passive Foreign Investment Company Status . Special, generally unfavorable, rules apply to the ownership and disposition of the stock of a PFIC. For U.S. federal income tax purposes, a non-U.S. corporation is classified as a PFIC if: • at least 75% of its gross income for the taxable year is “passive” income (referred to as the “income test”); or • at least 50% of the average value of its assets held during the taxable year is attributable to assets that produce passive income or are held for the production of passive income (referred to as the “asset test”). Passive income generally includes the following types of income: • dividends, royalties, rents, annuities, interest, and income equivalent to interest; and • net gains from the sale or exchange of property that gives rise to dividends, interest, royalties, rents, or annuities and certain gains from the commodities transactions. In determining whether we are a PFIC, we will be required to take into account a pro rata portion of the income and assets of each corporation in which we own, directly or indirectly, at least 25% by value. As described above, PFIC status of a non-U.S. corporation depends on the relative values of certain categories of assets and the relative amount of certain kinds of income for a taxable year. Therefore, our status as a PFIC for any given taxable year depends upon the financial results for such year and upon relative valuations, which are subject to change and beyond our ability to predict or control. Based on our most recent financial statements and projections and given uncertainty regarding the composition of our future income and assets, there is a significant risk that we may have been classified as a PFIC for the taxable year that ended on March 31, 2023 and may be classified as a PFIC for our current taxable year and possibly subsequent years. However, PFIC status is fundamentally factual in nature, depends on the application of complex U.S. federal income tax rules (which are subject to differing interpretations), generally cannot be determined until the close of the taxable year in question and is determined annually. Accordingly, there can be no assurance that we will not be a PFIC in our current taxable year or subsequent years. The PFIC rules are complex, and each U.S. Holder should consult its tax advisor regarding the application of the PFIC rules to us. 38 Default PFIC Rules Under Section 1291 of the Code. Generally, if we are or have been treated as a PFIC for any taxable year during a U.S. Holder’s holding period of common shares, subject to the special rules described below applicable to a U.S. Holder who makes a Mark-to-Market Election or a QEF Election (each as defined below), any “excess distribution” with respect to the common shares would be allocated ratably over the U.S. Holder’s holding period. The amounts allocated to the taxable year of the excess distribution and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations in that taxable year, as appropriate, and an interest charge would be imposed on the amount allocated to that taxable year. Distributions made in respect of common shares during a taxable year will be excess distributions to the extent they exceed 125% of the average of the annual distributions on common shares received by the U.S. Holder during the preceding three taxable years or the U.S. Holder’s holding period, whichever is shorter. In addition, dividends generally will not be qualified dividend income if we are a PFIC in the taxable year of payment or the preceding year. Generally, if we are treated as a PFIC for any taxable year during which a U.S. Holder owns common shares, any gain on the disposition of the common shares would be treated as an excess distribution and would be allocated ratably over the U.S. Holder’s holding period and subject to taxation in the same manner as described in the preceding paragraph and would not be eligible for the preferential long-term capital gains rate. Certain elections (including the Mark-to-Market Election and the QEF Election, as defined and discussed below) may sometimes be used to mitigate the adverse impact of the PFIC rules on U.S. Holders, but these elections may accelerate the recognition of taxable income and have other adverse consequences. Each current or prospective U.S. Holder should consult its own tax advisor regarding potential status of us as a PFIC, the possible effect of the PFIC rules to such holder in his, her or its particular circumstances, information reporting required if we were treated as a PFIC and the availability of any election that may be available to the U.S. holder to mitigate adverse U.S. federal income tax consequences of holding shares in a PFIC. QEF Election. A U.S. Holder of common shares in a PFIC generally would not be subject to the PFIC rules discussed above if the U.S. Holder had made a timely and effective election (a “QEF Election”) to treat us as a “qualified electing fund” (a “QEF”). Instead, such U.S. Holder would be subject to U.S. federal income tax on its pro rata share of our (i) net capital gain, which would be taxed as long-term capital gain to such U.S. Holder, and (ii) ordinary earnings, which would be taxed as ordinary income to such U.S. Holder, in each case regardless of whether such amounts are actually distributed to such U.S. Holder. However, a U.S. Holder that makes a QEF Election may, subject to certain limitations, elect to defer payment of current U.S. federal income tax on such amounts, subject to an interest charge. If such U.S. Holder is not a corporation, any such interest paid will be treated as “personal interest,” which is not deductible. A U.S. Holder that makes a timely and effective QEF Election generally (a) may receive a tax-free distribution from us to the extent that such distribution represents our “earnings and profits” that were previously included in income by such U.S. Holder because of such QEF Election and (b) will adjust such U.S. Holder’s tax basis in the common shares to reflect the amount included in income or allowed as a tax-free distribution because of such QEF Election. In addition, for U.S. federal income tax purposes, a U.S. Holder that makes a timely QEF Election generally will recognize capital gain or loss on the sale or other taxable disposition of the common shares. A QEF Election will be treated as “timely” if such QEF Election is made for the first taxable year in the U.S. Holder’s holding period for the common shares in which we are a PFIC. A U.S. Holder may make a timely QEF Election by filing the appropriate QEF Election documents at the time such U.S. Holder files a U.S. federal income tax return for such first year. If a U.S. Holder makes a QEF Election after the first taxable year in the U.S. Holder’s holding period for the common shares in which we are a PFIC, then, in addition to filing the QEF Election documents, a U.S. Holder may elect to recognize gain (which will be taxed under the rules discussed under “— Default PFIC Rules Under Section 1291 of the Code ”) as if the common shares were sold on the qualification date. The “qualification date” is the first day of the first taxable year in which we are a QEF with respect to such U.S. Holder. The election to recognize such gain can only be made if such U.S. Holder’s holding period for the common shares includes the qualification date. By electing to recognize such gain, such U.S. Holder will be deemed to have made a timely QEF Election. In addition, under very limited circumstances, it is possible that a U.S. Holder might make a retroactive QEF Election if such U.S. Holder failed to file the QEF Election documents in a timely manner. If a U.S. Holder fails to make a QEF Election for the first taxable year in the U.S. Holder’s holding period for the common shares in which we are a PFIC and does not elect to recognize gain as if the common shares were sold on the qualification date, such holder will not be treated as having made a “timely” QEF Election and will continue to be subject to the special adverse taxation rules discussed above under “— Default PFIC Rules Under Section 1291 of the Code ”. A QEF Election will apply to the taxable year for which such QEF Election is made and to all subsequent taxable years, unless such QEF Election is invalidated or terminated or the IRS consents to revocation of such QEF Election. If a U.S. Holder makes a QEF Election and, in a subsequent taxable year, we cease to be a PFIC, the QEF Election will remain in effect (although it will not be applicable) during those taxable years in which we are not a PFIC. Accordingly, if we become a PFIC in another subsequent taxable year, the QEF Election will be effective, and the U.S. Holder will be subject to the rules described above during any such subsequent taxable year in which we qualify as a PFIC. A U.S. Holder cannot make and maintain a valid QEF Election unless we provide certain U.S. tax information necessary to make such an election. On an annual basis, we intend to use commercially reasonable efforts to make available to U.S. Holders, upon their written request (a) timely information as to our status as a PFIC, and (b) for each year in which we are a PFIC, information and documentation that a U.S. Holder making a QEF Election with respect to us is required to obtain for U.S. federal income tax purposes. Each U.S. Holder should consult its own tax advisor regarding the availability of, and procedure for making, a QEF Election with respect to us. Mark-to-Market Election. A U.S. Holder of common shares in a PFIC would not be subject to the PFIC rules discussed above under “— Default PFIC Rules Under Section 1291 of the Code ” if the U.S. Holder had made a timely and effective election to mark the PFIC common shares to market (a “Mark-to-Market Election”). A U.S. Holder may make a Mark-to-Market Election with respect to the common shares only if such shares are marketable stock. Such shares generally will be “marketable stock” if they are regularly traded on a “qualified exchange,” which is defined as (a) a national securities exchange that is registered with the SEC, (b) the national market system established pursuant to section 11A of the Exchange Act, or (c) a non-U.S. securities exchange that is regulated or supervised by a governmental authority of the country in which the market is located, provided that (i) such non-U.S. exchange has trading volume, listing, financial disclosure, surveillance, and other requirements, and the laws of the country in which such non-U.S. exchange is located, together with the rules of such non-U.S. exchange, ensure that such requirements are actually enforced and (ii) the rules of such non-U.S. exchange ensure active trading of listed stocks. Our common shares will generally be treated as “regularly traded” in any calendar year in which more than a de minimis quantity of common shares is traded on a qualified exchange for at least 15 days during each calendar quarter. Each U.S. Holder should consult its own tax advisor with respect to the availability of a Mark-to-Market Election with respect to the common shares. In general, a U.S. Holder that makes a timely Mark-to-Market Election with respect to the common shares will include in ordinary income, for each taxable year in which we are a PFIC, an amount equal to the excess, if any, of (a) the fair market value of the common shares as of the close of such taxable year over (b) such U.S. Holder’s tax basis in such shares. A U.S. Holder that makes a Mark-to-Market Election will be allowed a deduction in an amount equal to the lesser of (a) the excess, if any, of (i) such U.S. Holder’s adjusted tax basis in the common shares over (ii) the fair market value of such shares as of the close of such taxable year or (b) the excess, if any, of 39 (i) the amount included in ordinary income because of such Mark-to-Market Election for prior taxable years over (ii) the amount allowed as a deduction because of such Mark-to-Market Election for prior taxable years. If a U.S. Holder makes a Mark-to-Market Election after the first taxable year in which we are a PFIC and such U.S. Holder has not made a timely QEF Election with respect to us, the PFIC rules described above under “— Default PFIC Rules Under Section 1291 of the Code ” will apply to certain dispositions of, and distributions on, the common shares, and the U.S. Holder’s mark-to-market income for the year of the election. If we were to cease being a PFIC, a U.S. Holder that marked its common shares to market would not include mark-to-market gain or loss with respect to its common shares for any taxable year that we were not a PFIC. A U.S. Holder that makes a Mark-to-Market Election generally will also adjust such U.S. Holder’s tax basis in his common shares to reflect the amount included in gross income or allowed as a deduction because of such Mark-to-Market Election. In addition, upon a sale or other taxable disposition of the common shares subject to a Mark-to-Market Election, any gain or loss on such disposition will be ordinary income or loss (to the extent that such loss does not to exceed the excess, if any, of (a) the amount included in ordinary income because of such Mark-to-Market Election for prior taxable years over (b) the amount allowed as a deduction because of such Mark-to-Market Election for prior taxable years). A Mark-to-Market Election applies to the taxable year in which such Mark-to-Market Election is made and to each subsequent taxable year unless the common shares cease to be “marketable stock” or the IRS consents to revocation of such election. Each U.S. Holder should consult its own tax advisor regarding the availability of, and procedure for making, a Mark-to-Market Election with respect to the common shares. Reporting . If we were to be treated as a PFIC in any taxable year, a U.S. Holder will generally be required to file an annual report with the IRS containing such information as the U.S. Treasury Department may require. Each U.S. Holder should consult its own tax advisor regarding our potential status as a PFIC, the possible effect of the PFIC rules to such holder and information reporting required if we were a PFIC, as well as the availability of any election that may be available to the holder to mitigate adverse U.S. federal income tax consequences of holding shares in a PFIC. Receipt of Foreign Currency The amount of a distribution paid in Canadian dollars or Canadian dollar proceeds received on the sale or other taxable disposition of common shares will generally be equal to the U.S. dollar value of the currency on the date of receipt. If any Canadian dollars received with respect to the common shares are later converted into U.S. dollars, U.S. Holders may realize foreign currency gain or loss on the conversion. Any gain or loss generally will be treated as ordinary income or loss and generally will be from sources within the United States for U.S. foreign tax credit purposes. Each U.S. Holder should consult its own tax advisor concerning the possibility of foreign currency gain or loss if any such currency is not converted into U.S. dollars on the date of receipt. Foreign Tax Credit Subject to certain limitations, a U.S. Holder who pays (whether directly or through withholding) Canadian or other non-U.S. income tax with respect to the common shares may be entitled, at the election of the U.S. Holder, to receive either a deduction or a credit for Canadian or other non-U.S. income tax paid. Dividends paid on common shares generally will constitute income from sources outside the United States. Any gain from the sale or other taxable disposition of the common shares by a U.S. Holder generally will constitute U.S. source income. The foreign tax credit rules (including the limitations with respect thereto) are complex, and each U.S. Holder should consult its own tax advisor regarding the foreign tax credit rules, having regard to such holder’s particular circumstances. Information Reporting; Backup Withholding Generally, information reporting and backup withholding will apply to distributions on, and the payment of proceeds from the sale or other taxable disposition of, the common shares unless (i) the U.S. Holder is a corporation or other exempt entity, or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number, certifies that the U.S. Holder is not subject to backup withholding and otherwise complies with the applicable requirements of the backup withholding rules. Backup withholding is not an additional tax. Any amount withheld generally will be creditable against a U.S. Holder’s U.S. federal income tax liability or refundable to the extent that it exceeds such liability provided the required information is provided to the IRS in a timely manner. In addition, certain categories of U.S. Holders must file information returns with respect to their investment in a non-U.S. corporation. For example, certain U.S. Holders must file IRS Form 8938 with respect to certain “specified foreign financial assets” (such as the common shares) with an aggregate value in excess of US$50,000 (and, in some circumstances, a higher threshold). Failure to do so could result in substantial penalties and in the extension of the statute of limitations with respect to such holder’s U.S. federal income tax returns. Each U.S. Holder should consult its own tax advisor regarding application of the information reporting and backup withholding rules to it in connection with an investment in our common shares. Medicare Contribution Tax U.S. Holders that are individuals, estates or certain trusts generally will be subject to a 3.8% Medicare contribution tax on, among other things, dividends on, and capital gains from the sale or other taxable disposition of, common shares, subject to certain limitations and exceptions. Each U.S. Holder should consult its own tax advisor regarding possible application of this additional tax to income earned in connection with an investment in our common shares. Recent Sales of Unregistered Securities None. Issuer Repurchases of Equity Securities None. Item 6. Reserved Not applicable. 40 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation The following discussion should be read in conjunction with our consolidated financial statements and notes thereto found elsewhere in this annual report. This annual report contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. For a detailed discussion of these risks and uncertainties, see Item 1A, “Risk Factors” of this annual report. We caution readers not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this annual report. We undertake no obligation to update forward-looking statements which reflect events or circumstances occurring after the date of this annual report, unless required by applicable securities laws. Introduction 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 financial position as at March 31, 2023 and for the twelve-month period then ended. This MD&A explains the material variations in our operations, financial position and cash flows for the years ended March 31, 2023 and 2022. Market data and certain industry data and forecasts included in this MD&A were obtained from internal corporation surveys, market research, and publicly available information, reports of governmental agencies and industry publications and 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 made. Similarly, internal surveys, industry forecasts and market research, which we believe to be reliable based upon our management’s 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 under Item 1.A “Risk Factors” in this annual report. While we believe our internal business, research is reliable and the market definitions we use in this MD&A are appropriate, neither our business research nor the definitions we use have been verified by any independent source. This MD&A, approved by the board of directors on June 23, 2023, should be read in conjunction with our audited consolidated financial statements for the year ended March 31, 2023, and 2022. Our audited financial statements were prepared in accordance with generally accepted accounting principles issued by the Financial Accounting Standards Board in the United States, or GAAP. 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. Our assets as at March 31, 2023, include cash and cash equivalents and short-term investments totalling $27.9 million and intangible assets and goodwill totalling $49.2 million. Our current liabilities total $3.4 million as at March 31, 2023 and are comprised primarily of amounts due to or accrued for creditors. Comparative Financial Information for the years ended March 31, 2023 and 2022 Year ended March 31, 2023 March 31, 2022 Increase (Decrease) $ $ $ Net loss (42,429 ) (9,819 ) 32,610 Basic and diluted loss per share (0.95 ) (0.27 ) 0.68 Total assets 79,123 128,620 (49,497 ) Working capital 1 25,879 42,021 (16,142 ) Total non-current liabilities 7,757 17,090 (9,333 ) Total shareholders’ equity 67,955 108,270 (40,315 ) 1. Working capital is calculated by subtracting total current liabilities from total current assets. Because there is no standard method endorsed by GAAP, the results may not be comparable to similar measurements presented by other public companies. Results of Operations Comparison of the year ended March 31, 2023, and 2022 The following table summarizes our results of operations for the year ended March 31, 2023 and 2022: Year ended March 31, 2023 March 31, 2022 Increase (Decrease) $ $ $ Operating expenses Research and development expenses, net of government assistance 9,972 5,559 4,413 General and administrative expenses 7,614 9,263 (1,649 ) Sales and marketing expenses 661 518 143 Impairment of Intangible assets 28,682 — 28,682 Impairment of Goodwill 4,826 — 4,826 Impairment of Assets held for sale 400 249 151 Loss from operating activities (52,155 ) (15,589 ) 36,566 Financial income 184 5,122 (4,938 ) Income tax recovery 9,542 648 8,894 Net loss (42,429 ) (9,819 ) 32,610 41 Net Loss The net loss of $42,429 or $0.95 loss per share for the year ended March 31, 2023, increased by $32,610 from the net loss of $9,819 or $0.27 loss per share for the year ended March 31, 2022. Research and development expenses Research and development expenses consist primarily of: • fees paid to external service providers such as contract research organizations ("CROs") and contract manufacturing organizations ("CMOs") related to clinical trials, including contractual obligations for clinical development, clinical sites, manufacturing and scale-up, and formulation of clinical drug supplies; • fees paid to contract service providers related to drug discovery efforts including chemistry and biology services; and • salaries and related expenses for personnel, including expense related to stock options. We record research and development expenses as incurred. Our research and development during the year ended March 31, 2023 was focused primarily on our clinical development programs GTX 104, GTX 102, and GTX 101 drug candidates. Research and development expenses during the year ended March 31, 2022, related to the completion of our TRILOGY Phase 3 clinical program for our former drug candidate CaPre, as well as the initiation and progression of development work related to GTX 104, GTX 102 and GTX 101. The following table summarizes our research and development expenses: Research and development expenses Year ended March 31, 2023 March 31, 2022 Increase (Decrease) $ $ $ Third-party contract research expenses: Clinical development programs: GTX 104 838 1,796 (958 ) GTX 102 1,779 61 1,718 GTX 101 2,612 538 2,074 Other third-party contract research expenses 605 724 (119 ) Professional fees 1,600 317 1,283 Other research and development costs 270 236 34 Government grants & tax credits (165 ) (577 ) 412 Total third-party research and development expenses 1 7,539 3,095 4,444 Salaries and benefits 1,742 2,017 (275 ) Stock-based compensation 591 447 144 Depreciation and write off of equipment 100 — 100 Total 9,972 5,559 4,413 42 1 Total third-party research and development expenses is calculated before salaries and benefits, depreciation, write-off of equipment and stock-based compensation. Because there is no standard method endorsed by GAAP, the results may not be comparable to similar measurements presented by other public companies. Total third-party research and development expenses before salaries and benefits, depreciation, amortization and stock-based compensation expenses for the year ended March 31, 2023, totalled $7,539 compared to $3,095 for the year ended March 31, 2022. This resulted in an increase of $4,444 related mostly to the continued work of clinical development programs for GTX-104, GTX-102 and GTX-101. Third-party contract research expenses related to GTX-104 amounted to $838 for the year ended March 31, 2023, compared to $1,796 for the year ended March 31, 2022. This resulted in a $958 decrease as our PK bridging for GTX-104 study wound down. third-party contract research expenses related to GTX-102 were $1,779 for the year ended March 31, 2023, compared to $61 for the year ended March 31, 2022. This resulted in a $1,718 increase due to the initiation of the PK bridging study for GTX-102 and for clinical trial materials. third-party contract research expenses related to GTX 101 amounted to $2,612 for the year ended March 31, 2023, compared to $538 for the year ended March 31, 2022. This resulted in a $2,074 increase and was mostly related to the planning and initiation of the Phase 1 single dose trial. The program related increases for GTX 104, GTX 102 and GTX 101 were offset by a decrease of $119, related to other third-party contract research expenses for non-clinical outside services. Professional fees of $1,600 for the year ended March 31, 2023, compared to $317 for the year ended March 31, 2022, amounted to an increase of $1,283. This is due to increased specialized clinical and regulatory consultants supporting our clinical programs for GTX-104, GTX-102 and GTX-101. Total third-party research and development expenses were reduced by $165 due to government credits eligible research activities related to our clinical programs GTX 104, GTX 102 and GTX 101. Salaries and benefits decreased by $275 to $1,742 for the year ended March 31, 2023, from $2,017 for the year ended March 31, 2022. The decrease relates to a reduced accrual of our employee incentive bonus program. General and administrative expenses General and administrative expenses consist primarily of salaries and benefits, including share-based compensation, related to our executive, finance, legal, and support functions. Other general and administrative expenses include professional fees for auditing, tax, consulting, rent and utilities, insurance and patent-related services. General and administrative expenses Year ended March 31, 2023 March 31, 2022 Increase (Decrease) $ $ $ Salaries and benefits 2,362 1,745 617 Professional fees 2,013 5,199 (3,186 ) Other 2,053 1,477 576 General and administrative expense before stock-based compensation and depreciation 1 6,428 8,421 (1,993 ) Stock-based compensation 1,123 842 281 Depreciation 63 — 63 Total 7,614 9,263 (1,649 ) 1 General and administrative sub-total expenses is calculated before stock-based compensation and depreciation. Because there is no standard method endorsed by GAAP, the results may not be comparable to similar measurements presented by other public companies. General and administrative expenses totaled $6,428 before stock-based compensation and depreciation expense for the year ended March 31, 2023, a decrease of $1,993, from $8,421 for the year ended March 31, 2022. The decrease was primarily a result of decreased legal, tax, accounting and other professional fees related to the Grace Therapeutics merger for the year ended March 31, 2022. Salaries and benefits increased by $617 to $2,362 for the year ended March 31, 2023, from $1,745 for the year ended March 31, 2022. The increase relates to severance amounts accrued in relation to the former CEO. The decrease in professional fees were partially offset by an increase in other expenses. Other expenses increased by $576 to $2,053 for the year ended March 31, 2023, from $1,477 for the year ended March 31, 2022. This increase was related to increased expenses for accounting software upgrades, and IP legal costs to support and maintain our patents relating to TX-104, GTX-102 and GTX-101. Sales and marketing Sales and marketing expenses consist primarily of salaries and benefits, including share-based compensation, related to our commercial functions. Sales and marketing expenses Year ended March 31, 2023 March 31, 2022 Increase (Decrease) $ $ $ Salaries and benefits 428 271 157 Professional fees — 83 (83 ) Other 136 116 20 Sales and Marketing expenses before stock-based compensation 1 564 470 94 Stock-based compensation 97 48 49 Total 661 518 143 1 Sales and marketing sub-total expenses is calculated before stock-based compensation. Because there is no standard method endorsed by GAAP, the results may not be comparable to similar measurements presented by other public companies. Sales and marketing expenses before stock-based compensation expense were $564 for the year ended March 31, 2023, compared to $470 for the year ended March 31, 2022. The increase of $94 was mostly due to an increase in salaries associated with added personnel. Aggregate stock-based compensation expense increased by $474 to $1,811, for the year ended March 31, 2023, as compared to $1,337 for the year ended March 31, 2022. 43 This increase was due to the timing of the stock options granted during the year ended March 31, 2023 and year ended March 31, 2022. Aggregate depreciation and amortization expense increased by $124 for the year ended March 31, 2023, to $124 as compared to nil for the year ended March 31, 2022. This increase is due to the impact of certain equipment being reclassified from held for sale to held for use during the year ended March 31, 2023, resulting in additional depreciation being recognized. Impairment In April 2023, we announced the strategic decision to prioritize development of GTX-104 with a goal to advance to commercialization, while conserving resources as much as possible to complete development efficiently. We estimate that the deferral could be 3 years given the timeline to complete the development and commercial launch of GTX 104. Further development of GTX-102 and GTX-101 will occur at such time as we obtain additional funding or enter into strategic partnerships. The decision to defer further development has triggered a comprehensive impairment review of our intangible assets in March 2023. Given the extended timeline, we increased the discount rates used to value the assets in order to recognize additional risks related to prioritizing one asset over the others, financing the projects given limited available resources and the need to preserve cash to advance GTX 104 as far as possible, potential competitor advances that could arise over three years, and the general market depression affecting small cap development companies like us and the prohibitively high dilution and expense of available funding in the capital markets. Increasing the discount rates significantly reduced the discounted cash flow values for each of the programs deferred. Accordingly, an impairment of intangible assets of $28,682 resulted in the year ended March 31, 2023, compared to nil for the year ended March 31, 2022. In addition, an impairment of $4,826 of goodwill resulted in the year ended March 31, 2023, compared to nil for the year ended March 31, 2022. Income tax recovery The impairment of $28,682 of the intangible assets resulted in an income tax recovery of $8,633 of the related deferred tax liability. 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, each without par value. Issued and outstanding fully paid shares, stock options, restricted shares units and warrants, were as follows for the periods ended (all amounts in the table below give effect to the 1-for-8 share consolidation we completed on August 31, 2021): March 31, 2023 March 31, 2022 Number outstanding Number outstanding Class A shares, voting, participating and without par value 44,612,831 44,288,183 Stock options granted and outstanding 4,445,492 2,989,381 May 2018 Canadian public offering of warrants exercisable at CAD$10.48 until May 9, 2023 824,218 824,218 December 2017 U.S. public offering of warrants exercisable at US$10.08 until December 19, 2022 — 884,120 December 2017 U.S. public offering broker warrants exercisable at US$10.10 until December 27, 2022 — 32,390 Total fully diluted shares 49,882,541 49,018,292 Cash Flows and Financial Condition between the years ended March 31, 2023 and March 31, 2022 Summary As at March 31, 2023, cash and cash equivalents totalled $27,875, a net decrease of $2,464 compared to cash and cash equivalents totalling $30,339 at March 31, 2022. Net cash used in operating activities During the years ended March 31, 2023 and 2022, our operating activities used cash of $15,913 and $17,234, respectively resulting in a decrease of $1,321. Cash used in operating activities during 2023 primarily related to our net loss of $42,429, adjusted for non-cash items such as stock-based compensation of $1,811, impairments of $33,908, income tax recovery of $9,542 and changes in our operating assets and liabilities of $181. Cash used in operating activities during 2022 primarily related to our net loss of $9,819, adjusted for non-cash items such as change in fair value of warrant liabilities of $5,197, unrealized foreign exchange gain of $370 and changes in our operating assets and liabilities of $2,786. Investing activities For the year ended March 31, 2023 our investing activities generated cash of $13,153 compared to cash used of $3,522 for the year ended March 31, 2022. The increase in cash generated was a function of an increase in proceeds from maturity of short-term investments included in 2022. Financing activities During the year ended March 31, 2023 we received net proceeds of approximately $304 from our at the market (ATM) program. During the year ended March 31, 2022, we did not have financing activities and used existing cash balances for operations purposes. ATM Program On June 29, 2020, we entered into an amended and restated sales agreement (the “Sales Agreement”) with B. Riley, Oppenheimer & Co. Inc. and H.C. Wainwright & Co., LLC (collectively, the “Agents”). Under the terms of the Sales Agreement, which has a three-year term, we may issue and sell from time-to-time common shares having an aggregate offering price of up to $75,000,000 through the Agents. Subject to the terms and conditions of the Sales 44 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. We and the Agents may terminate the Sales Agreement in accordance with its terms. Under the terms of the Sales Agreement, we have 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 the common shares. On November 10, 2021, we filed a prospectus supplement relating to our ATM program, expiring July 7, 2023, to restore available capacity to $75,000,000, with B. Riley, Oppenheimer & Co. Inc. and H.C. Wainwright & Co., LLC continuing to act as Agents. Under the terms of the Sales Agreement and the prospectus supplement, we may issue and sell from time-to-time common shares having an aggregate offering price of up to $75,000,000 through the Agents; however, our use of the shelf registration statement on Form S-3 will be limited for so long as we are subject to General Instruction I.B.6 of Form S-3, which limits the amounts that we may sell under the registration statement and in accordance with the Sales Agreement. The common shares will be distributed 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 volume and timing of sales under the ATM program, if any, will be determined at the sole discretion of our board of directors and management. During the year ended March 31, 2023, 324,648 common shares were sold under the ATM program for total gross proceeds of approximately $314. The common shares were sold at the prevailing market prices, which resulted in an average price of approximately $0.95 per share. During the year ended March 31, 2022, no common shares were sold under the ATM program. Financial Position The following table details the significant changes to the consolidated balance sheet as at March 31, 2023, compared to the prior fiscal year end at March 31, 2022: Accounts Increase (Decrease) $ Comments Cash and cash equivalents (2,464 ) See cash flow statement Investments (13,307 ) Decrease in cash available to invest Receivables 254 Timing of reimbursement of sales taxes Assets held for sale (352 ) Impairment of RKO and production equipment Prepaid expenses (122 ) Renewal of insurance contract and other prepaid expenses (advances to US vendors) offset by impairment of prepaid RKO Right of use asset 148 Adjustment to the net present value of lease contract for Sherbrooke Equipment (146 ) Depreciation expense, write off of assets Intangible assets (28,682 ) Related to Impairment Goodwill (4,826 ) Related to Impairment Trade and other payables 180 Timing of payments net of accruals Lease liability 190 Future obligations offset by payment of lease liability Derivative warrant liabilities (10 ) Change in fair value of derivative warrants Deferred tax liability (9,542 ) Related to Impairment of intangibles See the statement of changes in equity in our financial statements for details of changes to the equity accounts since March 31, 2022. 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 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 Canadian dollars. Funds received in U.S. dollars from equity financing's are invested as per our treasury policy in U.S. dollar investments and converted to Canadian dollars as appropriate to fulfill operational requirements and funding. Acquisition of Grace Therapeutics On August 27, 2021, we completed the Grace Therapeutics merger. In connection with the share-for-share noncash transaction, Grace Therapeutics was merged with a new wholly owned subsidiary of Acasti and became a subsidiary of Acasti. As a result, we acquired Grace Therapeutics entire therapeutic pipeline consisting of three unique clinical stage and multiple pre-clinical stage assets supported by an intellectual property portfolio consisting of various granted and pending patents in various jurisdictions worldwide. Under the terms of the acquisition, each issued and outstanding share of Grace Therapeutics common stock was automatically converted into the right to receive Acasti common shares equal to the equity exchange ratio set forth in the merger agreement. Consideration for Acquisition A total of 18,241,233 common shares of Acasti were issued to Grace Therapeutics stockholders as consideration for the acquisition. Total common shares issued 18,241,233 Acasti share price (closing share price on August 27, 2021) $ 3.3344 Fair value of common shares issued $ 60,824 Our acquisition of Grace Therapeutics has been accounted for as a business combination using the acquisition method of accounting. This acquisition method requires, among other things, that assets acquired, and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date. The valuation of assets acquired, and liabilities assumed was finalized during the fourth quarter of the year ended March 31, 2022. Measurement period adjustments to the preliminary purchase price allocation during 2022 included (i) an increase to intangible assets of $4,602; (ii) an increase to goodwill of $12,964; (iii) an increase to deferred tax liability of $17,536; and (iv) other individually insignificant adjustments to identifiable net assets of $30. The adjustments primarily resulted from the completion of the valuation of the intangible assets based on facts and circumstances that existed as of the acquisition date and did not result from intervening events subsequent to such date. 45 The following table summarizes the final fair value of assets acquired and liabilities assumed as of the acquisition date: $ Assets acquired and liabilities assumed Cash and equivalents 90 Prepaid expenses and other current assets 74 Intangible assets – in-process research and development 69,810 Goodwill 12,964 Accounts payable and accrued expenses (4,578 ) Deferred tax liability (17,536 ) Total assets acquired and liabilities assumed 60,824 Intangible assets of $69,810 relate to the value of IPR&D of Grace Therapeutics therapeutic pipeline, consisting of three unique clinical stage programs/assets supported by intellectual property. We estimated the fair value of the IPR&D intangible assets using a multi-period excess earnings method. The significant assumptions used in the valuation are the discount rate, the probability of clinical success of research and development programs, obtaining regulatory approval and forecasted net sales. Goodwill of $12,964 was calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from the other assets acquired that could not be individually identified and separately recognized. A deferred tax liability of $17,536 related to the identified intangible assets resulted. Acquisition-related expenses, which were comprised primarily of regulatory, financial advisory and legal fees, totaled $3.2 million for the year ended March 31, 2022 and were included in general and administrative expenses in the consolidated statements of loss and comprehensive loss. The net loss during the year ended March 31, 2022 attributed to Grace in the consolidated statement of income (loss), since the date of acquisition is $1,505. Assets Held for Sale In January 2020 and August 2020, we released Phase 3 TRILOGY clinical trial results for our former lead drug candidate, CaPre. The TRILOGY trials did not meet the primary endpoint which resulted in our board of directors deciding not to proceed with a filing of an NDA with the FDA. With the completion of the TRILOGY trials beginning in the second half of fiscal 2021, we committed to a plan and were actively marketing for the sale Other assets and Production Equipment which met the criteria for classification of assets held for sale: March 31, 2023 March 31, 2022 $ $ Reclassed as explained below Other assets (a) — 195 Production equipment (b) — 157 — 352 a. Other Assets Other assets represent krill oil ("RKO") held by the Corporation that was expected to be used in the conduct of R&D activities and commercial inventory scale up related to the development and commercialization of the CaPre drug. Given that the development of CaPre will no longer be pursued, the Corporation expected to sell this reserve. The other asset is being recorded at the fair value less costs to sell, which has resulted in an impairment loss of $195 (2022 - $249). Management’s estimate of the fair value of the RKO less cost -to sell, is based on current market conditions for the age of the RKO and the inability to sell it. These projections are based on Level 3 inputs of the fair value hierarchy and reflect management’s best estimate of market participants’ pricing of the assets as well as the general condition of the asset. The total impairment loss recognized, includes amounts paid for RKO in advance, but not yet received and was recorded previously as a prepaid. b. Production equipment March 31, 2022 Cost, net of previous impairment Accumulated depreciation Net book value $ $ $ Production equipment 1,179 (1,022 ) 157 1,179 (1,022 ) 157 Similarly, to the Other assets, the announcement of the outcomes of the TRILOGY clinical trials resulted in an impairment trigger for the production equipment. The impairment loss is based on management’s estimate of the fair value of the equipment less cost -to sell, which is based primarily on estimated market conditions for selling used equipment and the inability to sell. These projections are based on Level 3 inputs of the fair value hierarchy and reflect the Corporations best estimate of market participants’ pricing of the assets as well as the general condition of the assets. This resulted in an impairment loss of $157. In June 2022, we reclassed the following assets from assets held for sale as they no longer met the criteria of such classification. Cost, net of impairment Accumulated depreciation Net book value reclassed from held for sale $ $ $ Furniture and office equipment 17 (5 ) 12 Computer equipment 94 (6 ) 88 Laboratory equipment 585 (435 ) 150 696 (446 ) 250 46 Furthermore, depreciation expense of $94 was recognized related to the period from the date that the assets were classified as held for sale until June 30, 2022. The reclassification from held for sale to equipment was reflected on the comparative balance sheet. Contractual Obligations and Commitments Our contractual obligations and commitments include trade payables, operating lease obligations, CMO and CRO agreements, and the RKO supply agreement. 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. RKO supply agreement On October 25, 2019, we signed a supply agreement with Aker Biomarine Antartic. (“Aker”) to purchase raw krill oil product for a committed volume of commercial starting material for CaPre for a total fixed value of $3.1 million. As at March 31, 2023, the remaining balance of the commitment with Aker amounts to $2.8 million. During the second calendar quarter of 2022, Aker informed the Company that Aker believed it had satisfied the terms of the supply agreement as to their ability to deliver the remaining balance of krill oil product, and that the Company was therefore required to accept the remaining product commitment and to pay Aker the $2.8 million balance. We disagree with Aker’s position and believe that Aker is not entitled to further payment under the supply agreement. Accordingly, no liability has been recorded. The dispute was unresolved as of March 31, 2023 and remains unresolved. There is uncertainty as to whether the Company will be required to make further payment to Aker in connection with the dispute. Additionally, in the event the Company is required to accept delivery from Aker of the remaining balance of krill oil product under the supply agreement, there is uncertainty as to whether the Company can recover value from the product, which may result in the Company incurring a loss on the supply agreement in the near term. Use of Estimates and Measurement of Uncertainty The preparation of our 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, stock-based compensation, assets held for sale, valuation of intangible acquired from Grace Therapeutics, goodwill and the RKO supply agreement. Estimates and assumptions are also involved in measuring the accrual of services rendered with respect to research and development expenditures at each reporting date and determining which research and development expenses qualify for research and development tax credits and in what amounts. We recognize the tax credits once we have 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. Estimates and assumptions are also utilized in the assessment of impairment of equipment, and intangibles. Critical Accounting Policies Valuation of Intangible Assets and Goodwill In a business combination, the fair value of IPR&D acquired is capitalized and accounted for as indefinite-lived intangible assets, and not amortized until the underlying project receives regulatory approval, at which point the intangible assets will be accounted for as definite-lived intangible assets or discontinued. If discontinued, the intangible assets will be written off. R&D costs incurred after the acquisition are expensed as incurred. Our IPR&D and Goodwill was $49.3 million as of March 31, 2023, which represents 62% of total assets. Goodwill and indefinite-lived assets are not amortized but are subject to an impairment review annually and more frequently when indicators of impairment exist. An impairment of goodwill could occur if the carrying amount of a reporting unit exceeds the fair value of that reporting unit. An impairment of indefinite-lived intangible assets would occur if the fair value of the intangible asset is less than the carrying value. The nature of the assumptions in the intangible asset's impairment tests are considered critical due to a high level of subjectivity and judgment necessary to account for highly uncertain matters, and the impact of the assumptions on our financial condition and our operating performance could be material. We test goodwill for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount. If we conclude it is more likely than not that fair value of the reporting unit is less than its carrying amount, a quantitative impairment test is performed. We test indefinite lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount. Events that could result in an impairment, or trigger an interim impairment assessment, include the decision to discontinue the development of a drug, the receipt of additional clinical or nonclinical data regarding our drug candidates or a potentially competitive drug candidates, changes in the clinical development program for a drug candidate, or new information regarding potential sales for the drug candidates and increases in our weighted average cost of capital. Individual IPR&D projects and goodwill is tested for impairment on an annual basis in the fourth quarter, and in between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of each technology or our reporting unit below its carrying value. We identified the strategic realignment plan announced on April 4, 2023 to prioritize resources to GTX-104, from GTX-101 and GTX-102 triggered a comprehensive impairment review of our intangible assets and have considered these facts in our annual impairment test. Deferral of development for GTX 101 and 102 has extended the cash runway from existing resources and 47 has also reduced the values in the discounted cashflow due to the deferral. The result of the impairment assessment resulted in the following activity between March 31, 2022 and March 31, 2023: $ $ $ $ GTX 104 GTX 102 GTX 101 Total Intangible assets – in-process research and development Balance, beginning of the year 27,595 31,908 10,307 69,810 Impairment — (22,712 ) (5,970 ) (28,682 ) Balance, end of the year 27,595 9,196 4,337 41,128 The impairment of $28,682 of the identified intangible assets resulted in a recovery of $8,633 of the related deferred tax liability. $ Goodwill Balance, beginning of the year 12,964 Impairment (4,826 ) Balance, end of the year 8,138 The estimated fair values of our intangible assets were determined using the multi-period excess earnings method, which is a valuation methodology that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. The projected discounted cash flow models used to estimate the fair value of assets of our IPR&D reflect significant assumptions and are Level 3 unobservable data regarding the estimates a market participant would make in order to evaluate a drug development asset, including the following: • Probability of clinical success of research and development and obtaining regulatory approval. This estimate was based on various publicly available studies conducted by third parties; • Forecasted net sales from up-front and milestone payments, royalties and product sales. Comparable market transactions were used to estimate milestone and royalty revenues. The addressable market and patient acquisition rates were estimated based on studies we commissioned a third-party to conduct. The estimated sales prices of our technologies are based on competitors with similar drug products. We have made estimates related to deductions expected to be provided based on conventional commercial models to access the market; and • A discount rate reflecting our weighted average cost of capital and specific risk inherent in the underlying assets. The projected discounted cash flow model used to estimate the fair value of our reporting unit and intangible assets as of March 31, 2023 includes a significant assumption related to each project's probability of clinical success, which is reflected in the cash flows. Based on our fair value assessment, an impairment loss of GTX 104 would result if the probability of success assumption decreased more than approximately 6.2% for each year, all other assumptions remaining constant. Furthermore, a reasonably possible change of -1% in the probability of success assumption would decrease the fair value of GTX 101 and GTX 102 by $331K and $305K, respectively. The projected discounted cash flow model used to estimate the fair value of our reporting unit and the intangibles as of March 31, 2023 includes a significant assumption related to each project's projected net sales levels, which is reflected in the cash flows. Based on our fair value assessment, an impairment loss for GTX 104 would result if the net sales assumptions decreased more than approximately 11.8%, for each year, all other assumptions remaining constant. Furthermore, a reasonably possible change of -1% in the net sales assumptions would decrease the fair value of GTX 101 and GTX 102 by $119K and $233K, respectively. We believe that the net sales assumptions developed were applied with a conservative framework such as the exclusion of addressable markets outside the United States, which markets we expect to provide revenue upside if and when GTX-101, GTX-102 and GTX-104 are approved by the FDA. The following table depicts as at the impairment assessment, the discount rate used in the fair value model and the discount rate in which an impairment loss would occur for GTX 104. Discount assumption GTX 104 Discount rate used in fair value model 22.8% Discount rate that results in an impairment ≤ 24.1% Furthermore, a reasonably possible change of 1% in the discount rate assumption would change the fair value of GTX 101 and GTX 102 by $1.6M and $2.0M, respectively. During the year ended March 31, 2022, a discount rate of 19.2% was used in each of the programs as at the date of the acquisition. The valuation of our IPR&D has significant measurement uncertainty given the risks and uncertainties associated with the timely and successful completion of the development and commercialization of drug candidates. We engaged a third-party valuation firm to assist us with the valuation of the IPR&D and goodwill. Assumptions are difficult to make accurately and were mainly derived from life science studies, industry data, and peer company information that our management believes represent 48 appropriate comparable data. Estimates of value are required to be discounted to account for risks related to the inherent uncertainties of the overall development and commercialization processes. The summation of our Goodwill and IPR&D fair values, as indicated by our discounted cash flow calculations, were compared to our consolidated fair value, as indicated by our market capitalization, to evaluate the reasonableness of our calculations. Our determination of a reasonable control premium that an investor would pay, over and above market capitalization for a control position, included a number of factors: • Market control premium; The identification of recent public market information of comparable peer acquisition transactions. The selection of comparable peer acquisition transactions is subject to judgment and uncertainty. • Impact of low public float and limited trading activity on market capitalization: A significant portion of our common shares are owned by a concentrated number of investors. The public float of our common shares, calculated as the percentage of common shares freely traded by public investors divided by our total shares outstanding, is significantly lower than that of our publicly traded peers. Based on our evaluation of third-party market data, we believe there is an inherent discount impacting our share price due to the low public float and limited trading volume, thus impacting our market capitalization. The impairment assessment is sensitive to changes in forecasted cash flows, our selected discount rates as well as the implied control premiums. Changes to our assumptions, in particular changes in technological feasibility or changes in the regulatory approval process could materially affect the estimation of the fair value and could result in impairment charges in future quarters. Measurement of Assets Held for Sale and RKO Supply Agreement Assets that are classified as held for sale are measured at the lower of their carrying amount or fair value less expected selling costs (“estimated selling price”) with a loss recognized to the extent that the carrying amount exceeds the estimated selling price. The classification is applicable at the date upon which the sale of assets is probable, and the assets are available for immediate sale in their present condition. Assets, once classified as held for sale, are not subject to depreciation or amortization and both the assets and any liabilities directly associated with the assets held for sale are classified as current in our consolidated balance sheets. Subsequent changes to the estimated selling price of assets held for sale are recorded as gains or losses to the consolidated statements of income wherein the recognition of subsequent gains is limited to the cumulative loss previously recognized. In addition, there is judgment and potential for loss regarding the recognition and measurement of our RKO supply agreement with Aker to purchase RKO product for a committed volume of commercial starting material for CaPre for a total fixed value of $3.1 million, which is described in more detail in note 21 of our financial statements found elsewhere in this annual report. Financial Instruments Credit Risk Credit risk is the risk of a loss if a customer or counter party 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 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 our functional currency. On April 1, 2022, our functional currency was changed from the Canadian dollar to the US dollar. This change is reflected prospectively in our financial statements. Fluctuations related to foreign exchange rates could cause unforeseen fluctuations in our operating results. Since April 1, 2022, a portion of our expenses, salaries is incurred in Canadian dollars and research contracts in Euros, for which no financial hedging is in place. There is a financial risk related to the fluctuation in the value of the Canadian dollar and the Euro in relation to the U.S. dollar. In order to minimize the financial risk related to the fluctuation in the value of the Canadian dollar in relation to the U.S. dollar, certain funds continue to be invested as cash and cash equivalents and short-term investments in the Canadian dollar. The following table provides an indication of our significant foreign exchange currency exposures from functional currency at the following dates: March 31, 2023 March 31, 2022 CAD $ Euro US $ Euro Cash and cash equivalents 2,132 — 35,079 — Investments 15 — 14,872 — Trade and other payables (1,219 ) (32 ) (2,130 ) (79 ) 928 (32 ) 47,821 (79 ) The following exchange rates are those applicable to the following periods and dates: March 31, 2023 March 31, 2022 Average Reporting Average Reporting US$ per CAD$ (2022 - CAD per US$) 0.7400 0.7398 1.2536 1.2505 US$ per Euro (2022- CAD per Euro) 1.0415 1.0839 1.4569 1.3836 Based on our foreign currency exposures noted above, varying the above foreign exchange rates to reflect a 5% strengthening of the Canadian dollar and Euro would have an increase (decrease) in net loss as follows, assuming that all other variables remain constant: 49 March 31, 2023 March 31, 2022 $ $ Increase (decrease) in net loss 34 3,129 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 March 31, 2023 and March 31, 2022 was as follows: Cash and cash equivalents Short-term fixed interest rate Investments Short-term fixed interest rate 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. We have incurred operating losses and negative cash flows from operations in each year since our inception. We expect to incur significant expenses and continued operating losses for the foreseeable future. We expect our expenses will increase substantially in connection with our ongoing activities, particularly as we advance clinical development for our drug candidates in our pipeline; continue to engage contract manufacturing organizations to manufacture our clinical study materials and to ultimately develop large-scale manufacturing capabilities in preparation for commercial launch; seek regulatory approval for our drug candidates; and add personnel to support our drug product development and future drug product launch and commercialization. We do not expect to generate revenue from product sales unless and until we successfully complete drug development and obtain regulatory approval, which we expect will take several years and is subject to significant uncertainty. To date, we have financed our operations primarily through public offerings and private placements of our common shares, warrants and convertible debt and with the proceeds from research tax credits. Until such time that we can generate significant revenue from drug product sales, if ever, we will require additional financing, which we expect to be sourced from a combination of public or private equity offerings or debt financing's 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 us to relinquish certain rights related to our technologies or drug product candidates. Adequate additional financing may not be available to us on acceptable terms, or at all. Our inability to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategy. We expect to have sufficient cash resources to satisfy our objectives into the second quarter of calendar 2025, which is 21 to 24 months from the issuance date of the financial statements included elsewhere in this annual report. We require additional capital to fund our daily operating needs beyond that time. We plan to raise additional capital prior to that time in order to maintain adequate liquidity. Negative results from studies, if any, and depressed prices of our common shares could impact our ability to raise additional financing. Raising additional equity capital is subject to market conditions not within our control. If we do not raise additional funds in this time period, we may not be able to realize our assets and discharge our liabilities in the normal course of business. In May 2023, we implemented a strategic realignment plan to enhance shareholder value that resulted in engaging a new management team and greatly reducing our research and development activities including a reduction in workforce. Future Accounting Changes We have considered recent accounting pronouncements and concluded that they are either not applicable to our business or that the effect is not expected to be material to our consolidated financial statements as a result of future adoption. 50 Item 7A. Quantitative and Qualitative Disclosure About Market Risk Information relating to quantitative and qualitative disclosures about market risks is detailed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.” Item 8. Financial Statements and Supplementary Data See our consolidated financial statements beginning on page F-1 of this annual report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.