Anavex Life Sciences Corp. — FY2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014. The filing was signed December 29, 2014. Anavex is a clinical-stage biopharmaceutical company with no product revenue. The December 2014 start of its Alzheimer’s Phase 2a trial occurred after the reporting period.
Business context and development
Lead programs are ANAVEX 2-73 and ANAVEX PLUS (ANAVEX 2-73 with donepezil), being developed for Alzheimer’s disease. The Phase 2a trial is designed to assess safety and exploratory efficacy in mild-to-moderate Alzheimer’s patients. The company also describes preclinical CNS and cancer candidates. It plans to seek potential partners over the following 12 months.
Financial performance and liquidity
| Metric | FY2014 / Sept. 30, 2014 | FY2013 / Sept. 30, 2013 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $2.969 million | $2.137 million |
| Research and development expense | $732,395 | $263,847 |
| Net loss, GAAP | $11.368 million | $3.700 million |
| Cash used in operating activities | $2.659 million | $777,573 |
| Cash | $7.262 million | $345,074 |
| Working capital | $5.910 million | Deficit of $1.559 million |
| Total liabilities | $7.161 million | $2.857 million |
Gross profit and operating margins are not meaningful because the company had no revenue. The GAAP loss includes substantial non-cash financing-related charges. Management presented an adjusted, non-GAAP net loss of $2.761 million, excluding $8.608 million of financing-related charges and adjustments; this measure is not a substitute for the reported GAAP loss.
Cash increased primarily from a $10 million convertible-debenture financing, which generated $9.579 million of net financing cash flow after fees and other financing activity. The company said it expected to fund operations for the next 12 months using cash on hand and future equity or debt financing; it cautioned that additional financing might not be available on acceptable terms.
Material changes, debt and unusual items
- Operating expenses rose about 39% year over year, with higher R&D activity and financing-related investor-relations, professional-fee and compensation costs.
- The March 2014 financing comprised $10 million of unsecured, non-interest-bearing convertible debentures due in 2044, convertible at $0.30 per share and later amended to $0.25. About $2.554 million of principal had been converted by September 30; the reported debenture carrying value was $263,727 after a large debt discount. The filing also reports $5.456 million of derivative liabilities.
- Amendments to the debentures triggered debt-extinguishment accounting and an $8.099 million non-cash loss; the filing also records non-cash gains from changes in derivative fair value. These accounting items materially increased reported loss but did not represent equivalent operating cash outflows.
- At year-end, 74.9 million warrants were outstanding, and the filing identifies 107.9 million potentially dilutive shares from options, warrants and convertible debentures as anti-dilutive for loss-per-share purposes. The company said authorized shares were insufficient to settle all potential conversions and exercises, a factor in derivative-liability accounting.
- After year-end, Lincoln Park agreed to invest $500,000 for 2 million shares and receive 4 million warrants. The company also disclosed additional debenture conversions after year-end.
Outlook, risks and controls
- Management’s development plans depend on clinical results, regulatory approvals, funding and potential commercial partners. Preclinical findings do not establish human efficacy; the Phase 2a study is exploratory.
- The filing says accumulated deficit was $52.573 million, the company had never generated operating revenue, and its history of losses and lack of revenue raised substantial doubt about its ability to continue as a going concern.
- Key risks include clinical or regulatory failure, inability to raise capital, dilution, competition, uncertain patent protection and reliance on third parties. The company reports one issued U.S. patent and five U.S. patent applications, with certain inventor documentation or assignment matters outstanding.
- Management concluded disclosure controls and internal control over financial reporting were not effective at September 30, 2014, citing weaknesses in accounting staffing and expertise, segregation of duties, monitoring, and controls over equity accounting. Remediation was planned, with reassessment targeted for year-end 2015. The auditor gave an unqualified opinion on the financial statements but did not audit internal-control effectiveness.
- The company disclosed disputed secured promissory notes and did not accrue claimed late fees, which it considered unenforceable. It reported no material pending legal proceedings.
Important facts for investors to verify
- Phase 2a trial enrollment, design, timing and results, including safety and efficacy for ANAVEX 2-73 and ANAVEX PLUS.
- Cash burn and runway against management’s stated 12-month funding expectation, including actual subsequent financing.
- Debenture balances, conversion terms, derivative valuations and the potential dilution from warrants and other securities.
- Progress in remediating material weaknesses and whether controls were subsequently found effective.
- Patent ownership, co-inventor documentation and the extent of protection for the lead programs.