ANAVEX LIFE SCIENCES CORP. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, three months ended December 31, 2014. Financial statements are unaudited and presented in U.S. dollars. Anavex is a clinical-stage biopharmaceutical company with no product revenue.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2014 | Comparable 2013 period |
|---|---|---|
| Revenue | None | None |
| Operating expenses | $770,678 | $309,608 |
| Research and development | $318,625 | $5,180 |
| General and administrative | $452,053 | $304,428 |
| Net income (loss) | $(786,718) | $358,637 |
| Basic loss (earnings) per share | $(0.02) | $0.01 |
| Cash used in operating activities | $(693,070) | $(434,990) |
With no revenue, operating margins are not meaningful. The prior-year profit reflected a $683,000 financing-related gain, primarily from a change in the fair value of derivative liabilities; the current quarter reported a net loss. Interest and finance expense was $77,009 in the quarter.
At December 31, 2014, cash was $6,980,924, down $281,214 from September 30, 2014. Current assets were $7,048,500 and current liabilities $1,418,152, producing working capital of $5,630,348. Total liabilities were $6,577,372, including $5,159,220 in non-interest-bearing liabilities: $221,220 carrying value of senior convertible debentures and $4,938,000 of derivative liabilities. Current promissory notes were $98,312. Total assets were $7,050,498 and stockholders’ equity $473,126. The filing does not present a conventional debt-to-equity or operating-margin measure.
Cash used in operations increased as clinical-trial work began. Financing provided $411,856 of cash, including $500,000 from a share sale, partly offset by $88,144 of promissory-note repayment. There was no investing cash flow in the quarter.
Material changes and developments
- R&D expense rose by $313,445 year over year, mainly due to the ANAVEX 2-73 Phase 2a trial, initiated in December 2014. Management expected R&D spending to increase further during the fiscal year.
- In October 2014, Lincoln Park purchased 2,000,000 shares for $500,000; Anavex also issued 4,000,000 five-year warrants with exercise prices of $0.30 and $0.42. The warrant accounting included derivative liabilities.
- During the quarter, 5,604,668 shares were issued upon conversion of $1,401,167 of debenture principal at $0.25 per share. Shares outstanding increased from 47,200,237 at September 30 to 54,804,905 at December 31; 56,441,000 were outstanding as of February 13, 2015.
- After quarter-end, a further 1,636,096 shares were issued upon conversion of $409,024 of debentures. The company’s stock began trading on OTCQX in December, and the first patient in the Phase 2a trial was dosed in January 2015.
- Cash and cash equivalents were $95,927 at December 31, 2013, versus $6,980,924 at December 31, 2014.
Outlook, risks and unusual items
The Phase 2a randomized trial is assessing safety and exploratory efficacy of ANAVEX 2-73 alone and with donepezil (ANAVEX PLUS) in mild-to-moderate Alzheimer’s disease. Management said it intends to use most available capital for this program and related clinical development, and to pursue discussions with potential partners over the next 12 months. No specific financial or clinical guidance was provided.
Management stated that existing cash and possible future equity or debt financing were expected to fund operations, but warned that additional financing may not be available on acceptable terms. If funding is insufficient, the company may delay or scale back development or cease operations; equity financing would dilute existing holders. The company had 150 million authorized common shares, which it said were insufficient to cover all outstanding conversion and exercise rights. It reported 107,265,140 potentially dilutive shares excluded from diluted loss per share as anti-dilutive.
The company disputes the enforceability of two secured, 12% promissory notes due on demand, totaling $98,312 at quarter-end. The notes are secured by company assets, including intellectual property; possible late fees were not accrued because management considers them unenforceable. Derivative liabilities are valued using models and assumptions, including highly subjective volatility estimates. The quarter also included a $42,771 gain on debenture conversions and a $29,000 charge related to the October warrant issuance.
Management concluded that disclosure controls and procedures were not effective at quarter-end because of material weaknesses previously disclosed in the 2014 annual report. It said it intended to take steps to remediate them; no material change in internal control over financial reporting was reported during the quarter. The filing reported no material pending legal proceedings.
Key facts for investors to verify
- Trial enrollment, safety findings and progress of the Phase 2a ANAVEX 2-73/ANAVEX PLUS program; the filing provides no trial results.
- Cash runway and expected development costs against the reported operating cash burn and management’s expectation of higher R&D spending.
- Potential dilution from outstanding debentures, warrants and options, and the company’s authorized-share capacity.
- Status and potential exposure relating to the disputed secured promissory notes and unaccrued late fees.
- Remediation of the disclosed material weaknesses in disclosure controls and procedures.