Anavex Life Sciences (AVXL) - 2019 Q4 - Annual Report

Part I Business Anavex Life Sciences Corp. is a clinical-stage biopharmaceutical company developing therapeutics for CNS diseases using a precision medicine approach Overview and Strategy The company develops CNS therapeutics through precision medicine, identifying biomarkers for patient selection, with ANAVEX2-73 targeting sigma-1 receptor to restore cellular homeostasis - Anavex is a clinical-stage biopharmaceutical company using precision medicine for CNS diseases with high unmet needs[12] - The lead compound, ANAVEX2-73, is being developed for Alzheimer's, Parkinson's, and Rett syndrome[13] - The company's approach focuses on activating the SIGMAR1 gene to restore cellular homeostasis, which is disrupted in many neurodegenerative diseases[14][15] - Genomic analysis of patients treated with ANAVEX2-73 identified SIGMAR1 and COMT as key biomarkers, suggesting that selecting patients based on these genetic variants could improve clinical outcomes[16] Clinical Studies Overview Anavex is conducting multiple clinical trials for ANAVEX2-73, including a Phase 2b/3 study for Alzheimer's, three Phase 2 studies for Rett syndrome, and a Phase 2 trial for Parkinson's Disease Dementia - A Phase 2b/3 double-blind, placebo-controlled study of ANAVEX2-73 in approximately 450 Alzheimer's patients commenced in August 2018[20] - Three Phase 2 clinical trials for ANAVEX2-73 in Rett syndrome were initiated in 2019: a US-based study, the AVATAR study in Australia, and the EXCELLENCE study for pediatric patients in Australia[23][25][26] - A Phase 2 double-blind, randomized, placebo-controlled trial with ANAVEX2-73 in 120 Parkinson's Disease Dementia (PDD) patients was initiated in October 2018[29] Our Pipeline The company's SIGMACEPTOR™ Discovery Platform yields a pipeline including lead candidate ANAVEX2-73 for neurodegenerative and neurodevelopmental diseases, and preclinical candidates like ANAVEX3-71 for Alzheimer's and FTD - ANAVEX2-73 has received FDA Orphan Drug Designation for Rett syndrome and infantile spasms, and Rare Pediatric Disease (RPD) designation for Rett syndrome[36] - ANAVEX3-71, a preclinical candidate, has shown potential in Alzheimer's models by enhancing neuroprotection and cognition and has received FDA Orphan Drug Designation for Frontotemporal dementia (FTD)[53][54] - ANAVEX1-41 is a preclinical sigma-1 agonist showing neuroprotective benefits[56] - ANAVEX1066 is a preclinical candidate for neuropathic and visceral pain[59] - ANAVEX1037 is a preclinical candidate for prostate and pancreatic cancer, showing antitumor potential by selectively killing cancer cells[61] Patents, Trademarks and Intellectual Property Anavex holds a portfolio of eight U.S. patents and numerous applications covering its drug candidates, with key ANAVEX2-73 patents expiring in the 2030s, forming a core corporate asset - The company holds or has exclusive rights to eight U.S. patents, eight U.S. patent applications, and various international patent applications[75] - Key U.S. patents for ANAVEX2-73 cover its composition with donepezil (exp. 2034), crystalline forms (exp. 2036-2037), and methods for treating seizures (exp. 2035)[76] - The company holds exclusive rights to two issued U.S. patents for ANAVEX3-71, covering the compound and its use in treating diseases like Alzheimer's, expected to expire in 2030[78] Risk Factors The company faces significant risks including financial losses, dependence on external financing, internal control weaknesses, drug development uncertainty, intense competition, and intellectual property challenges Risks Related to our Company The company has a history of losses, an accumulated deficit exceeding $133 million, no revenue, and depends on external financing, compounded by a material weakness in internal controls over financial reporting - The company has an accumulated deficit of over $133 million since inception through September 30, 2019, has generated no revenue, and expects negative cash flows for the foreseeable future[98] - The company is an early-stage entity with all potential drug compounds in early clinical development, facing risks of unforeseen capital requirements and failure in clinical trials[99][100] - A material weakness was identified in internal control over financial reporting regarding the accounting for the Australian R&D incentive program, where income was previously recognized upon cash receipt instead of when qualifying expenditures were incurred[103] Risks Related to our Business The company's business faces substantial risks from extensive R&D and regulatory approval processes, potential clinical trial failures, reliance on third-party manufacturers and CROs, intense competition, and product liability claims - Drug candidates require extensive R&D and regulatory approvals, and there is a high risk of failure in clinical trials due to ineffectiveness or harmful side effects[105] - Substantial additional funding is required for R&D, and the inability to secure it could halt or cease operations[106][107] - The company relies on third parties like contract research organizations (CROs) and manufacturers, and their failure to perform could cause significant delays[126][127] - The company faces significant competition from large pharmaceutical companies with greater resources and experience[124] Risks Related to our Common Stock The company's common stock is subject to price volatility and potential dilution from future equity issuances, including agreements with Lincoln Park Capital and Cantor Fitzgerald for up to $50 million each - The common stock price is volatile, which could affect the ability to raise capital and may result in dilution for investors if funds are raised at lower prices[135][136] - The sale of up to $50 million of common stock to Lincoln Park Capital may cause significant dilution and could cause the stock price to fall[142][143] - The "at-the-market" offering agreement with Cantor Fitzgerald & Co. for up to $50 million of common stock may also result in shareholder dilution and a decrease in share price[147] Risks Related to our Intellectual Property The company's success depends on its ability to obtain, maintain, and defend intellectual property, facing risks of patent invalidation, infringement claims, and costly global protection challenges - The company's ability to commercialize products may be impaired if it cannot obtain and maintain sufficient intellectual property protection[148] - Patents may be challenged, narrowed, or invalidated, and competitors could design around them. Defending patents is expensive and time-consuming[151][153] - The company could face third-party claims of IP infringement, which could lead to substantial damages, litigation expenses, and halt development efforts[162][164] - Failure to comply with obligations in licensing agreements, such as the one with Life Science Research Israel Ltd. for ANAVEX3-71, could lead to termination of the license[157][158] - Protecting intellectual property rights globally is prohibitively expensive, and laws in some foreign countries offer less protection than in the U.S[176] Properties The company leases its main office in New York, NY, for approximately $16,000 per month, deeming the space suitable for current operations - The company leases its main office in New York, NY, with monthly lease costs of approximately $16,000[178] Legal Proceedings The company reports no material pending legal proceedings beyond routine litigation incidental to its business - There are no material pending legal proceedings involving the company, its subsidiaries, directors, or major stockholders[179] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under "AVXL", with 56.1 million shares outstanding as of December 2019, and it retains earnings for development, not paying dividends - Common stock is quoted on NASDAQ under the symbol "AVXL"[180] - As of December 12, 2019, there were 56,123,076 shares of common stock issued and outstanding[180] - The company has not paid and does not intend to pay cash dividends, retaining earnings for operations[182] Equity Compensation Plan Information as of September 30, 2019 | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuances under equity compensation plans (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 12,050,553 | $4.02 | 4,934,704 | Management's Discussion and Analysis of Financial Condition and Results of Operation In fiscal 2019, operating expenses increased to $29.1 million, driven by a $9.0 million rise in R&D for clinical trials, resulting in a net loss of $26.3 million, with cash maintained by stock issuances Results of Operations For fiscal 2019, total operating expenses increased to $29.1 million, primarily due to a $9.0 million rise in R&D costs for ANAVEX2-73 clinical trials, leading to a net loss of $26.3 million Comparison of Operating Expenses (Fiscal Years 2019 vs. 2018) | Expense Category | FY 2019 (in millions) | FY 2018 (in millions) | Change (in millions) | | :--- | :--- | :--- | :--- | | Research & Development | $22.3 | $13.3 | +$9.0 | | General & Administrative | $6.8 | $6.0 | +$0.8 | | Total Operating Expenses | $29.1 | $19.3 | +$9.8 | Net Loss (Fiscal Years 2019 vs. 2018) | Metric | FY 2019 | FY 2018 | | :--- | :--- | :--- | | Net Loss | $26.3 million | $17.3 million | | Net Loss per Share | $0.54 | $0.39 | - The increase in R&D expenses was primarily due to costs associated with the Phase 2b/3 Alzheimer's trial ($6.2 million), Phase 2 Parkinson's trial ($3.3 million), and Phase 2 Rett syndrome studies ($3.0 million)[197][198][199] Liquidity and Capital Resources As of September 30, 2019, the company had $20.3 million in working capital and $22.2 million in cash, with increased operating cash use offset by $17.8 million from stock issuances Working Capital (as of Sept 30) | | 2019 | 2018 | | :--- | :--- | :--- | | Current Assets | $25,329,373 | $26,052,793 | | Current Liabilities | $5,039,674 | $3,884,626 | | Working Capital | $20,289,699 | $22,168,167 | Cash Flow Summary (Fiscal Years) | Cash Flows | 2019 | 2018 | | :--- | :--- | :--- | | Cash used in operating activities | $(18,527,117) | $(12,582,406) | | Cash provided by financing activities | $17,782,109 | $8,072,787 | - Financing activities in FY2019 included issuing 6.7 million shares to Lincoln Park for gross proceeds of $17.8 million[208] - As of September 30, 2019, approximately $45.3 million remained available for purchase by Lincoln Park under the 2019 Purchase Agreement[212] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2019 and 2018, with the auditor issuing an unqualified opinion on financials but an adverse opinion on internal controls due to a material weakness in R&D incentive accounting Consolidated Balance Sheet Data (as of Sept 30) | | 2019 | 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $22,185,630 | $22,930,638 | | Total Assets | $25,329,373 | $26,206,322 | | Total Liabilities | $5,039,674 | $3,884,626 | | Total Stockholders' Equity | $20,289,699 | $22,321,696 | Consolidated Statement of Operations Data (for year ended Sept 30) | | 2019 | 2018 | | :--- | :--- | :--- | | Total operating expenses | $(29,106,948) | $(19,333,591) | | Net loss | $(26,294,979) | $(17,252,736) | | Net Loss per share | $(0.54) | $(0.39) | - The independent auditor, BDO USA, LLP, issued an adverse opinion on the company's internal control over financial reporting as of September 30, 2019[237] - A material weakness was identified regarding the accounting for the Australian research and development incentive program[242] - Prior period financial statements were adjusted to correct the timing of recognition of R&D incentive income, resulting in a decrease to the accumulated deficit at October 1, 2017, by $1,629,513[258][260] Controls and Procedures Management concluded that disclosure controls were ineffective as of September 30, 2019, due to a material weakness in accounting for the Australian R&D incentive program, with remediation efforts underway - Disclosure controls and procedures were concluded to be ineffective as of September 30, 2019[343] - A material weakness was identified in the internal control over financial reporting for the accounting of the Australian R&D incentive income[344] - The error involved recognizing the incentive income when cash was received, instead of accruing it in the period the qualifying R&D expenditures were incurred[344] - Remediation efforts include evaluating policies and procedures to ensure the program's accounting is assessed and reconciled on a quarterly basis[348] Part III Directors, Executive Officers and Corporate Governance This section outlines the company's Board of Directors and executive officers, including Christopher Missling as CEO and Sandra Boenisch as CFO, and details the Audit, Nominating, and Compensation Committees - The company's leadership includes Christopher Missling, PhD (President, CEO, Director) and Sandra Boenisch, CPA, CGA (Principal Financial Officer, Treasurer)[354] - The company has established an Audit Committee, a Nominating and Corporate Governance Committee, and a Compensation Committee[365][368][370] - The Board has determined that Claus van der Velden qualifies as an "audit committee financial expert"[365] Executive Compensation The executive compensation program aims to attract and retain talent through competitive pay, with CEO Christopher Missling's total compensation for fiscal 2019 at $3,380,039, largely comprising option awards Summary Compensation for Named Executive Officers (Fiscal Year 2019) | Name and Principal Position | Year | Salary ($) | Bonus ($) | Option Awards ($) | Other Compensation ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Christopher Missling, PhD (President, CEO) | 2019 | 512,500 | 50,000 | 2,806,339 | 11,200 | 3,380,039 | | Sandra Boenisch (Principal Financial Officer) | 2019 | 72,327 | 13,561 | 138,672 | - | 224,560 | - CEO Christopher Missling's employment agreement provides for an annual base salary of $550,000 and eligibility for an annual cash bonus[384] - Employment agreements for named executive officers contain provisions for vesting of stock options upon a change of control[395][396] Security Ownership of Certain Beneficial Owners and Management As of December 12, 2019, directors and executive officers collectively owned 11.9% of common stock, with CEO Christopher Missling holding 8.6%, and Park West Asset Management LLC as the only external beneficial owner above 5% Security Ownership as of December 12, 2019 | Name of Beneficial Owner | Amount of Beneficial Ownership | Percent of Class | | :--- | :--- | :--- | | Christopher Missling (CEO/Director) | 5,163,430 | 8.6% | | Directors & Executive Officers as a group (7 persons) | 7,268,298 | 11.9% | | Park West Asset Management LLC | 3,495,615 | 6.2% | Principal Accounting Fees and Services This section details the $229,763 in audit fees paid to BDO USA, LLP for fiscal 2019, all pre-approved by the Audit Committee, covering financial statement audits, reviews, and regulatory filings Fees Paid to Independent Registered Public Accounting Firm | Fee Category | 2019 | 2018 | | :--- | :--- | :--- | | Audit Fees | $229,763 | $224,181 | | Audit Related Fees | - | - | | Tax Fees | - | - | | All Other Fees | - | - | | Total Fees | $229,763 | $224,181 | - All services provided by the independent registered public accounting firm were pre-approved by the Audit Committee[415] Part IV Exhibits, Financial Statement Schedules This section lists the exhibits filed with the Form 10-K, including corporate governance documents, material contracts, employment agreements, certifications, and XBRL data files - Exhibits filed include corporate governance documents, material contracts, certifications, and XBRL data[419][420]