AVXL

Business Context and Reporting Period

Company: ANAVEX LIFE SCIENCES CORP.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2009
Business Stage: Development Stage (Pre-revenue)
Operations: The company is a biopharmaceutical entity focused on discovering and developing novel drug targets for cancer and central nervous system diseases using its proprietary SIGMACEPTOR platform. Lead candidates include ANAVEX 2-73 (Alzheimer's) and ANAVEX 7-1037 (Prostate Cancer). The company has not generated any revenue since inception.

Key Financial Metrics

Note: The company reported a non-cash gain of $649,038 from the change in fair value of derivative liabilities, which significantly reduced the net loss for the quarter.

Material Changes vs. Prior Period

• Net Loss Reduction: Net loss decreased by approximately 52% to $448,501 from $928,042 in the prior year quarter. This improvement was primarily driven by a $649,038 non-cash gain on derivative liabilities and a foreign exchange gain of $8,270.
• Expense Fluctuations: Total operating expenses decreased by $44,126. Consulting fees dropped to $454,074 from $515,567 due to reduced stock-based compensation charges. Conversely, legal fees increased significantly to $27,908 from $3,610 due to patent and corporate activity.
• Liquidity Deterioration: Cash on hand plummeted from $350,994 (Sept 30, 2009) to $21,034 (Dec 31, 2009), a decrease of $329,960. The working capital deficit widened by $668,754 to $4,360,268.
• Accounting Policy Change: The company adopted new accounting guidance (ASC 815-40-15) requiring embedded conversion features in promissory notes to be classified as derivative liabilities. This resulted in a cumulative effect adjustment increasing the accumulated deficit by $255,976 as of October 1, 2009.

Outlook, Risks, and Management Commentary

• Going Concern: Management explicitly states that the company's history of losses and lack of revenue cast "substantial doubt" on its ability to continue as a going concern. The company requires additional financing to meet obligations and fund operations.
• Capital Requirements: The company anticipates needing up to $10 million for the 12 months ending December 31, 2010, primarily to fund clinical trials for ANAVEX 2-73, ANAVEX 1-41, and ANAVEX 7-1037.
• Financing Strategy: Operations are funded through equity and debt. Recent financing included the issuance of units and promissory notes. There is no assurance that additional financing will be available on commercially reasonable terms.
• Key Risks:
  • Regulatory & Clinical: No guarantee that drug candidates will succeed in clinical trials or receive FDA approval.
  • Market Risk: Stock trades on the OTC Bulletin Board and is subject to "penny stock" regulations, which may limit liquidity.
  • Internal Controls: Management concluded that disclosure controls and procedures were not effective as of the end of the period due to weaknesses disclosed in the prior annual report.
• Unusual Items: The financial results are heavily influenced by non-cash items, specifically the mark-to-market valuation of derivative liabilities and stock-based compensation.

Investor Verification Checklist

• Cash Runway: Verify the sufficiency of the $21,034 cash balance against immediate debt maturities and operating burn rate.
• Debt Maturities: Confirm the status of promissory notes totaling over $2.5 million, many of which are due on demand or within the next few months (e.g., Jan 13, 2010).
• Derivative Liability Volatility: Assess the impact of future stock price fluctuations on the company's reported earnings due to the mark-to-market accounting of derivative liabilities.
• Financing Progress: Monitor announcements regarding the $10 million capital raise required for clinical trials; failure to secure this could halt operations.
• Internal Controls: Review subsequent filings for updates on the remediation of ineffective disclosure controls and procedures.