Anavex Life Sciences Corp. — Form 10-Q Summary
Reporting period: Three months ended December 31, 2015, the first quarter of fiscal 2016. The unaudited statements compare the quarter with the three months ended December 31, 2014; balance-sheet figures compare December 31, 2015 with September 30, 2015.
Business context
Anavex is a clinical-stage biopharmaceutical company developing treatments for neurodegenerative and other diseases. Its lead candidate, ANAVEX 2-73, was in a Phase 2a study for mild-to-moderate Alzheimer’s disease, including evaluation alone and with donepezil (ANAVEX PLUS). The company reported no product revenue.
Financial performance and liquidity
| Metric | Quarter ended Dec. 31, 2015 | Comparable 2014 period / prior balance-sheet date |
|---|---|---|
| Revenue | $0 | $0; company states it has not earned revenue since inception |
| Operating expenses | $4.53 million | $770,678 |
| Research and development expense | $670,736 | $318,625 |
| Net loss | $3.95 million | $786,718 |
| Basic and diluted loss per share | $0.12 | $0.06 |
| Operating cash used | $3.25 million | $693,070 |
| Financing cash provided | $1.81 million | $411,856 |
| Cash at period-end | $13.85 million | $15.29 million at Sept. 30, 2015 |
| Working capital | $11.49 million | $12.81 million at Sept. 30, 2015 |
| Current liabilities | $2.53 million | $2.66 million at Sept. 30, 2015 |
There is no meaningful operating margin to report because the company had no revenue and incurred a loss. Total liabilities were approximately $2.53 million, including $82,410 in current promissory notes and $265 in carrying value of long-term convertible debentures. The promissory notes are secured, due on demand, and bear stated interest of 12%.
Changes and unusual items
- Operating expenses rose by $3.76 million year over year. Management attributed much of the increase to expanded management and one-time compensation associated with vesting the final tranche of restricted stock for the CEO: $610,000 in stock compensation and $2.29 million in additional compensation obligations. The $2.29 million was included in common stock to be issued.
- Other income was $595,540, versus net other expense of $16,040 in the prior-year quarter, primarily reflecting $610,148 of grant income. This included $571,093 under an Australian government R&D incentive program and $39,055 recognized from a Michael J. Fox Foundation grant.
- Stock-based compensation totaled $826,020 in the cash-flow reconciliation. The quarter’s net loss included a $17,615 income tax expense.
- Cash fell by $1.44 million. Operating activities used $3.25 million, partly offset by $1.81 million of financing proceeds. Cash flows used no cash for investing activities.
- The company issued shares under its Lincoln Park financing and reported 34,653,885 common shares outstanding at December 31, 2015, up from 32,044,213 at September 30. A one-for-four reverse split took effect October 7, and the stock began trading on Nasdaq on October 28.
Outlook, clinical update, and risks
- Management said it expected to fund operations through existing cash and future equity or debt financing, but gave no specific cash-runway estimate. It warned that unavailable or untimely financing could force delays or reductions in R&D, or cessation of operations; equity financing would dilute shareholders.
- A new Lincoln Park agreement provides for up to $50 million of share purchases over 36 months, subject to conditions and the effectiveness of a related registration statement. Availability is not equivalent to cash already raised.
- Management reported that Phase 2a Part A met its safety objective and described exploratory cognitive measures as improved from baseline among 32 patients. A January 8, 2016 company update, after quarter-end, reported a positive dose-response relationship in a planned interim analysis. These are company-reported interim findings, not proof of efficacy.
- The company received an SEC subpoena on December 22, 2015 in a formal investigation it believed related to unusual trading activity in its shares. It said it was cooperating and could not predict the outcome. The company also disclosed one filed lawsuit, which it believed lacked merit and presented a remote loss probability.
- The company disputed the enforceability of its secured promissory notes and had not accrued late fees, which it considered unenforceable. The notes include potentially significant late-fee provisions; enforcement could create additional exposure.
- Management concluded disclosure controls were not effective because of material weaknesses previously reported in the 10-K. Additional finance staff were hired during the quarter to improve segregation of duties; remediation was still intended, not reported as complete.
Important facts for investors to verify
- Current cash burn, expected operating runway, and the conditions and remaining capacity available under the $50 million Lincoln Park agreement.
- Clinical-trial status, patient numbers, statistical support, safety findings, and whether interim cognitive observations are confirmed in subsequent analyses.
- The nature and resolution of the SEC investigation and the status and potential exposure of the disclosed lawsuit.
- Enforceability and potential fees relating to the secured, overdue promissory notes, and any effect of their security claims on company assets.
- Share dilution from financing agreements, awards, options, warrants, and shares to be issued, including the substantial related-party compensation recorded this quarter.
- Progress in remediating the material weaknesses in disclosure controls and financial reporting.