AVXL

Business Context and Reporting Period

Company: Anavex Life Sciences Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2014
Business Stage: Development Stage Company
Primary Focus: Pharmaceutical development of drug candidates for Alzheimer's disease (lead compound ANAVEX 2-73 and combination therapy ANAVEX PLUS) and other CNS disorders. The Company has no commercial revenue and relies on financing to fund operations.

Key Financial Metrics

Note: The Company reported a net loss of $(1,018,860) for the three months ended March 31, 2014.

Material Changes vs. Prior Period

• Liquidity Transformation: Cash balances increased from $345,074 at September 30, 2013, to $9,193,558 at March 31, 2014. This represents an increase of $8,848,484, driven primarily by the issuance of $10,000,000 in Senior Convertible Debentures.
• Operating Expenses: Expenses for the six-month period increased 145.1% to $1,330,775. The increase was largely due to a non-cash compensation charge of $610,000 related to the vesting of restricted stock for the President upon meeting performance conditions, alongside increased investor relations and professional fees.
• Other Income: The Company recorded a non-cash gain of $683,000 from the change in fair value of derivative financial instruments (warrants) prior to their reclassification to equity. This contrasts with a loss in the prior comparable period.
• Debt Structure: The Company eliminated its derivative liability of $904,000 (warrants) by amending terms and reclassifying them to equity. Simultaneously, it assumed $10,000,000 in new long-term convertible debt.

Guidance, Outlook, and Risks

• Capital Allocation: Proceeds from the $10 million debenture issuance are designated for clinical trials of ANAVEX 2-73 and ANAVEX PLUS, specifically a prospective Phase 1b/2a study and subsequent Phase 2 trials.
• Future Financing: The Company maintains a Purchase Agreement with Lincoln Park Capital Fund, LLC, allowing for the sale of up to $10,000,000 of common stock over 25 months. During the period, $188,170 was raised under this agreement.
• Management Commentary: Management expects R&D expenses to continue increasing as clinical trials advance. The Company plans to identify potential partners within the next 12 months.
• Risks and Contingencies:
  • Internal Controls: Management concluded that disclosure controls and procedures were not effective due to material weaknesses previously disclosed.
  • Legal Disputes: The Company disputes the enforceability of certain secured promissory notes ($103,330 total) issued to former officers/directors and has not accrued late fees, intending to seek legal remedies if enforcement is attempted.
  • Liquidity Risk: While currently well-capitalized, the Company has no revenue and requires additional financing to sustain operations beyond the current cash runway.

Investor Verification Checklist

• Debt Conversion Terms: Verify the conversion price ($0.30/share) and warrant exercise prices ($0.30 and $0.42) of the new $10M debentures to assess potential dilution.
• Stock-Based Compensation: Confirm the vesting conditions for the $610,000 non-cash expense and the status of the 2,000,000 options granted to the CEO.
• Legal Status of Secured Notes: Review the status of the disputed promissory notes owed to former officers and any potential litigation risks.
• Clinical Trial Timeline: Validate the projected start dates for the Phase 1b/2a study of ANAVEX PLUS against the current cash burn rate.
• Internal Control Remediation: Assess the specific steps management is taking to remediate the material weaknesses in internal controls over financial reporting.