Anavex Life Sciences Corp. — Form 10-Q Summary
Business context and reporting period. Anavex is a clinical-stage pharmaceutical company developing drug candidates, principally ANAVEX 2-73 for Alzheimer’s disease and ANAVEX PLUS, a combination with donepezil. This unaudited filing covers the fiscal third quarter and nine months ended June 30, 2014; the fiscal year ends September 30. The company reported no revenue.
Financial results and position
| Metric | Three months ended June 30, 2014 | Nine months ended June 30, 2014 | Prior-year comparable period |
|---|---|---|---|
| Revenue | $0 | $0 | $0 |
| Operating expenses | $998,833 | $2,329,608 | $125,982; $668,960 |
| Net loss | $1,009,090 | $1,669,313 | $151,924; $711,541 |
| Loss per share, basic | $0.03 | $0.04 | $0.01; $0.02 |
| Cash used in operating activities | Not separately presented | $1,742,524 | $293,065 |
There is no meaningful gross margin to report because the company had no revenue. The filing does not provide a clear operating margin measure.
- Liquidity: Cash was $8,179,681 at June 30, 2014, versus $345,074 at September 30, 2013. Current assets were $8,198,600 and current liabilities were $1,904,142, giving working capital of $6,294,458, compared with a $1,559,211 working-capital deficit at September 30, 2013.
- Cash flows: Nine-month financing cash inflow was $9,579,458, principally from the $10 million debenture issuance, net of financing fees and other financing activity. Investing cash outflow was $2,327.
- Debt: The company issued $10 million principal amount of unsecured, non-interest-bearing senior convertible debentures, due March 18, 2044 and convertible at $0.30 per share. A $10 million debt discount reduced their June 30 carrying amount to $1,091. Promissory notes payable were $200,835.
- Potential dilution: The company had 74,735,632 warrants outstanding at June 30, 2014, with a weighted-average exercise price of $0.40; 67,666,666 were issued in connection with the debenture financing. The filing also reports 77,905,632 potentially dilutive shares excluded from loss per share as anti-dilutive.
Material changes versus prior periods
- Third-quarter operating expenses rose to $998,833 from $125,982; nine-month expenses rose to $2,329,608 from $668,960. Management attributed the increases to financing-related professional and investor-relations costs, compensation, and increased research and development.
- Nine-month net loss increased to $1,669,313 from $711,541, despite $660,295 of net other income. This included a $683,000 noncash gain from the change in fair value of warrant liabilities. After warrant amendments, the warrants were reclassified to equity, and management said this type of non-operating income was not expected to recur.
- Operating cash use increased to $1,742,524 from $293,065, reflecting increased corporate and research activity.
- On March 13, 2014, the company completed a $10 million convertible-debenture financing. It also issued 67.7 million related warrants, creating substantial potential dilution.
Outlook, risks, and unusual items
- Management planned a prospective Phase 2a study of ANAVEX 2-73 and ANAVEX PLUS, followed by a Phase 2 trial, and intended to seek potential partners over the following 12 months. The filing does not provide a clear detailed clinical-trial timetable or budget.
- On July 21, 2014, after quarter-end, the company announced that cGMP manufacturing of ANAVEX 2-73 had been secured for Phase 2a trials. The debenture-related resale registration statement became effective July 23, 2014.
- Management intended to use financing proceeds for research and development, clinical trials, and related intellectual property work. It expected to fund operations with cash on hand and future equity or debt financing, but warned that additional financing might not be available on acceptable terms; a shortfall could delay or scale back development or operations. Further equity financing could dilute shareholders.
- Three promissory notes totaling $200,835 bear 12% interest; two are secured by company assets, including intellectual property, and are due on demand. The company disputes the issuance and enforceability of the two secured notes and has not accrued claimed late fees, which it considers unenforceable.
- Management concluded that disclosure controls and procedures were not effective at June 30, 2014 because of material weaknesses previously disclosed in the 2013 Form 10-K. It intended to take remediation steps and noted that full segregation of duties may not be economically feasible.
- Clinical development and commercialization remain uncertain: management cautioned that preclinical results may not translate to humans. The filing reports no material pending legal proceedings, but identifies the disputed notes as a potential legal matter if collection is pursued.
Important facts for investors to verify
- Clinical-trial initiation, design, funding, and regulatory milestones for ANAVEX 2-73 and ANAVEX PLUS, including progress following the cGMP manufacturing announcement.
- Cash burn and runway against planned development costs, and whether further financing or partnerships are secured.
- The terms, accounting treatment, and potential dilution from the $10 million debentures and outstanding warrants; confirm the share count and dilution assumptions used in per-share disclosures.
- Status and potential consequences of the disputed secured promissory notes, including their asserted priority over assets and intellectual property.
- Remediation of the disclosed material weaknesses in disclosure controls and procedures.