Anavex Life Sciences Corp. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2013. The unaudited statements are for a development-stage pharmaceutical company with no product revenue.
Business context and outlook
Anavex is developing drug candidates, led by ANAVEX 2-73 for Alzheimer’s disease; ANAVEX PLUS combines ANAVEX 2-73 with donepezil. The company reported that its Phase 1 single-ascending-dose study of ANAVEX 2-73 was completed in 2011 and was generally tolerated at doses below the protocol-defined maximum tolerated range of 55–60 mg. Clinical trials had not resumed by quarter-end because of limited funding.
Management planned a multiple-ascending-dose study of ANAVEX 2-73 and ANAVEX PLUS, followed by a Phase 2 study, with initiation targeted for the first half of fiscal 2014. It also planned to seek potential partners within 12 months. These plans depend on obtaining financing; the filing gives no assurance they will be achieved.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2013 | Comparable 2012 period |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $309,608 | $415,867 |
| Net income (loss) | $358,637 | ($453,517) |
| Cash used in operating activities | $434,990 | $131,573 |
| Cash provided by financing activities | $188,170 | $200,000 |
The quarter’s reported net income was driven by a $683,000 noncash gain from remeasuring warrant-related derivative liabilities, not operating revenue. Operating expenses fell 25.6%, primarily because consulting and research-and-development expenses were lower; the company said executive compensation was recorded as salaries and wages rather than consulting fees. Research and development expense was $5,180, versus $127,003 in the prior-year quarter.
At December 31, 2013, cash was $95,927, down from $345,074 at September 30, 2013. Current assets were $148,752 and current liabilities were $1,821,141, producing a working-capital deficit of $1,672,389. Current liabilities included $1,620,777 of accounts payable and accrued liabilities and $200,364 of promissory notes payable. The filing reports an accumulated deficit of $40,846,335.
The company had no revenue and no meaningful operating margin. The filing does not provide a clear debt-to-equity or conventional profitability-margin measure. All listed promissory notes were current liabilities; two notes were secured, bore 12% interest, and were due on demand.
Material changes, risks, and unusual items
- Warrant accounting: Amendments to warrants during the quarter meant they no longer qualified for derivative-liability accounting. The company recognized a $683,000 fair-value gain and reclassified $221,000 from liabilities to equity; the derivative liability was zero at quarter-end. Management expected this type of non-operating gain not to recur.
- Financing and dilution: Under its Lincoln Park agreement, the company issued 400,000 shares for $188,170 and 2,510 commitment shares during the quarter. It may sell up to a further $9.9 million of shares over the agreement period, at its discretion, but cannot sell under the agreement when the closing share price is below $0.50. Future equity financing would dilute existing holders.
- Funding and going concern: Management estimated cash needs of approximately $6 million over the next 12 months. The filing states that the working-capital deficit, accumulated losses, expected further losses, and need for financing raise substantial doubt about the company’s ability to continue as a going concern. Failure to secure funding could delay or scale back research and development or threaten continued operations.
- Disputed notes: The company disputed the issuance and enforceability of two secured notes to former officers/directors. The notes include potential late fees, which the company had not accrued because it considered them unenforceable; the filing says it would consider a legal remedy if enforcement were attempted.
- Controls: Management concluded disclosure controls and procedures were not effective, citing material weaknesses previously disclosed. It intended to take steps to remediate them, while noting that full segregation of duties may not be economically feasible.
- Clinical and development risk: Candidates remain in development, and the filing cautions that preclinical results may not translate to human efficacy or successful commercialization. Clinical progress depends on financing and potential research partners.
Management stated that there were no material pending legal proceedings and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the company raised sufficient financing to meet the stated approximately $6 million cash requirement and resume planned clinical studies.
- Cash burn, overdue or disputed liabilities, and the status and enforceability of the secured notes and potential late fees.
- Progress, timing, funding, and results of planned ANAVEX 2-73 and ANAVEX PLUS studies, including any partner arrangements.
- The terms and actual availability of remaining Lincoln Park financing, including the $0.50 share-price threshold and resulting dilution.
- The basis for the quarter’s $683,000 noncash warrant gain and the reported earnings-per-share figures, given the derivative accounting changes.
- Remediation of the disclosed material weaknesses and whether disclosure controls become effective.