AVXL

Business Context and Reporting Period

Company: ANAVEX LIFE SCIENCES CORP.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Stage: Development Stage Company (No revenue generated since inception in 2004).
Operations: The company is engaged in the discovery and development of novel drug targets (SIGMACEPTOR platform) for neurodegenerative diseases (Alzheimer's, epilepsy) and cancer. Lead candidate ANAVEX 2-73 is preparing for Investigational New Drug (IND) filing.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Loss Increase: Net loss for the nine months ended June 30, 2010, increased to $5.99 million from $3.51 million in the prior year period. This was driven primarily by non-cash charges related to derivative liabilities and debt accretion.
• Derivative Liability Charges: A significant non-cash loss of $993,232 was recorded for the nine-month period due to the change in fair value of derivative liabilities embedded in convertible promissory notes. This compares to $0 in the prior year.
• Debt Accretion: Accretion expense on debt discounts increased to $1.24 million for the nine months ended June 30, 2010, compared to $19,331 in the prior year, following the adoption of new accounting policies (ASC 815-40-15) regarding embedded conversion features.
• Operating Expenses: Research and Development (R&D) expenses increased to $1.64 million (nine months 2010) from $1.07 million (nine months 2009) due to increased research activities. Consulting fees decreased slightly to $1.51 million from $1.62 million.
• Liquidity: Cash increased by $1.11 million to $1.46 million, primarily due to proceeds from private placements ($2.66 million in equity issuance and $1.38 million in promissory notes during the period).

Guidance, Outlook, Risks, and Unusual Items

• Going Concern: The company has an accumulated deficit of $19.1 million and a working capital deficit of $6.3 million. Management states there is substantial doubt about the company's ability to continue as a going concern without additional financing.
• Capital Requirements: Management anticipates requiring up to $10 million for the 12 months ending June 30, 2011, to fund clinical trials for ANAVEX 2-73 and other compounds. No committed sources of financing currently exist.
• Unusual Items: The financial results are heavily impacted by the fair value accounting of derivative liabilities. The value of these liabilities fluctuates with the company's stock price, creating volatility in reported earnings that does not reflect cash flow.
• Recent Financing: On June 29, 2010, the company sold 941,000 units at $2.50 per unit for gross proceeds of $2.35 million. On July 5, 2010 (subsequent event), 400,000 units were issued for services.
• Risk Factors: Risks include failure to secure additional funding, failure of clinical trials, regulatory approval delays, and the high volatility of the stock price affecting derivative liability valuations.

Investor Verification Checklist

• Derivative Liability Valuation: Verify the assumptions used in the Black-Scholes model (volatility, risk-free rate) for the $3.5 million derivative liability, as this significantly impacts the reported deficit.
• Cash Runway: Assess if the current cash balance of $1.46 million is sufficient to fund operations until the next anticipated financing round, given the $10 million funding requirement for the upcoming year.
• Debt Covenants and Maturities: Review the terms of the $3.56 million in promissory notes, specifically the conversion features and maturity dates, to understand potential dilution or liquidity pressure.
• Stock-Based Compensation: Confirm the valuation of stock options and warrants issued for services, as a significant portion of expenses is non-cash equity compensation.
• Clinical Milestones: Monitor the progress of the IND filing for ANAVEX 2-73, as failure to advance this lead candidate would materially impact the company's valuation and ability to raise capital.