Anavex Life Sciences Corp. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended June 30, 2011; filed August 12, 2011. Financial statements are unaudited. The company is a development-stage biopharmaceutical business focused on drug candidates for central nervous system diseases and cancer. Its lead candidate, ANAVEX 2-73, entered Phase I human clinical trials in the first quarter of 2011.
Financial performance and position
| Metric | Three months ended June 30, 2011 | Nine months ended June 30, 2011 | Comparable 2010 period |
|---|---|---|---|
| Revenue | $0 | $0 | $0 |
| Operating expenses | $1.637 million | $4.954 million | $1.303 million / $3.684 million |
| Net loss | $1.579 million | $5.886 million | $1.966 million / $5.992 million |
| Basic and diluted loss per share | $0.06 | $0.24 | $0.09 / $0.28 |
| Cash used in operating activities | Not stated for quarter | $2.879 million | $2.930 million |
At June 30, 2011, cash was $1.223 million, versus $264,669 at September 30, 2010. Current assets were $1.276 million and current liabilities were $2.253 million, producing a working capital deficit of $976,269 (down from $2.964 million). Promissory notes had a reported carrying amount of $827,900; a $57,500 derivative liability was also recorded. Total liabilities were $2.253 million. The company reported no revenue, so revenue margins are not meaningful.
Financing provided $3.837 million of cash during the nine months, including $3.087 million from share issuances and $750,000 from promissory notes. In June, warrant exercises generated $1.575 million and 700,000 shares. Common shares outstanding increased to 25,921,574 from 23,516,952 at September 30, 2010.
Changes versus the prior comparable periods
- Operating expenses increased by $334,274 for the quarter and $1.270 million for the nine-month period. Management attributed the increases principally to consulting and infrastructure costs, clinical-trial insurance, and increased research and development activity for ANAVEX 2-73.
- Despite higher operating expenses, net losses declined: by $386,811 for the quarter and $106,542 for the nine months. Lower noncash debt-discount accretion and improved derivative fair-value results, along with lower interest expense, were principal factors.
- Research and development expense rose to $777,971 for the quarter and $2.006 million for the nine months, from $613,161 and $1.640 million, respectively.
- Cash increased largely through financing, while operating cash use remained substantial. The working capital deficit narrowed mainly because cash increased and current liabilities fell.
Outlook, risks and unusual items
- Management estimated cash needs of approximately $10 million over the next 12 months to support operations, the next ANAVEX 2-73 clinical trial, and development work on other compounds. The filing says there were no committed sources of additional financing; failure to raise funds could delay or reduce research, or threaten continued operations.
- The company reported an accumulated deficit and stated that its recurring losses and working capital deficit raise substantial doubt about its ability to continue as a going concern. Management described equity financing and promissory notes as possible funding sources, but had no formal plan in place and gave no assurance of success.
- New 8% convertible notes totaling $750,000 mature in 2012 and are convertible at $3 per unit, with a share and warrant in each unit. Conversion and redemption provisions include financing-related triggers and anti-dilution terms.
- Conversion of prior notes at a reduced price resulted in $504,160 of debt-conversion expense. Settlement of other debt and payables with shares produced reported losses of $198,738 and $249,090, respectively. Stock-based compensation was $1.015 million for the nine months.
- Key business risks include clinical and regulatory failure, dependence on future financing, potential shareholder dilution, intellectual-property challenges, competition, and reliance on third parties. Management reported that disclosure controls and procedures were not effective as of June 30, 2011; it reported no material change in internal control over financial reporting during the quarter.
- The filing reported no material pending legal proceedings and no defaults upon senior securities. Management stated that there were no material off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile the accumulated deficit: the balance sheet reports $27.782 million, while the notes and MD&A cite $27.231 million as accumulated losses since inception. The filing text does not clearly explain this difference.
- Confirm the timing, design, funding, and progress of the next ANAVEX 2-73 clinical trial, and whether any results or milestones have since changed the stated development outlook.
- Assess whether the company obtained financing sufficient to meet its stated $10 million 12-month cash requirement, including the terms and dilution from any subsequent securities issuance.
- Review the maturity, conversion, redemption, and anti-dilution provisions of the $750,000 convertible notes, as well as the derivative-liability valuation assumptions.
- Evaluate the going-concern disclosure, the working capital deficit, and the reported ineffective disclosure controls when reviewing subsequent filings.