# ANAVEX LIFE SCIENCES CORP. (AVXL) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from ANAVEX LIFE SCIENCES CORP.'s 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/1314052/000173112221002062/e3306_10-k.htm Accession: 0001731122-21-002062 Filing date: 2021-11-24 Report date: 2021-09-30 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/AVXL/ All MD&A years: /company/AVXL/mda/ Next year: /company/AVXL/mda/fy2022/ (FY 2022) ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion should be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal year ended September 30, 2021, included elsewhere in this Annual Report on Form 10-K. Financial Overview We are in the development stage and have not earned any revenues since our inception in 2004. We do not anticipate earning any revenues until we can establish an alliance with other companies to develop, co-develop, license, acquire or market our products. Our operating costs consist primarily of research and development activities including the cost of clinical studies and clinical supplies as well as clinical drug manufacturing and formulation. Research and development expenses also include personnel related costs such as salaries and wages, and third-party contract research organization (CRO) expenses in support of these clinical studies. Personnel costs include salaries and wages, benefits, and non-cash stock-based compensation charges associated with options and other equity awards granted to employees and consultants who are directly engaged in support of our research and development activities. 38 General and administrative expenses consist of personnel costs, expenses for outside professional services and expenses for associated with operating as a public company. Personnel costs consist of salaries and wages, benefits and stock-based compensation for general and administrative personnel. Outside professional services and public company expenses, include expenses related to compliance and reporting, additional insurance expenses, audit and SOX compliance, expenses associated with patent research, applications and filings, investor and shareholder relations activities and other administrative expenses and professional services Year ended September 30, 2021 During fiscal 2021, we made significant progress in the advancement of clinical studies for ANAVEX®2-73, including completing enrollment of our international Phase 2b/3 Alzheimer’s disease trial, completion of our proof-of-concept Phase 2 Parkinson’s disease dementia trial, continued advancement of a multi-regional Phase 2/3 clinical program for the treatment of Rett syndrome, including completion of the Phase 2 U.S. trial, expansion of the AVATAR Phase 2 study internationally into the United Kingdom and the commencement of the EXCELLENCE Phase 2/3 pediatric Rett syndrome study and expansion of this trial into Canada and the United Kingdom. Additionally, we advanced the first in human Phase 1 clinical trial of ANAVEX®3-71 with focus on the treatment of Frontotemporal Dementia (FTD). Operating Expenses Our operating expenses for fiscal 2021 increased to $42.0 million, from $31.1 million in fiscal 2020. The increase is attributable to an increase in research and development expenses of $7.8 million in 2021 to $33.0 million, primarily due to the advancement of our clinical programs, as described above. General and administrative expenses for fiscal 2021 increased to $9.0 million, from $5.9 million in fiscal 2020, most significantly related to an increase in personnel and an increase in associated non-cash stock option compensation charges. During fiscal 2021, we utilized $30.4 million to fund our operations, compared to $21.3 million during fiscal 2020. Our cash position increased to $152.1 million at September 30, 2021, an increase of $122.9 million over the prior year. Cash for operations was generated through the issuance of shares of common stock under financing arrangements described below, and through the completion of a registered direct offering. We will continue to see an increase in our research and development expenditures as we advance our ANAVEX®2-73 clinical studies, including adding extension studies to allow us to continue to gather longer term data, continuing to advance our other pipeline compounds such as ANAVEX®3-71, and as we continue to add additional staffing to manage and support these clinical studies. Other income Net other income for the year ended September 30, 2021 was $4.4 million as compared to $4.8 million for fiscal 2020. The primary reason for the decrease in other income was due to an increased foreign exchange loss associated with Incentive and other receivables denominated in Australian dollars, and related impact from the fluctuation of the Australian dollar against the US dollar during the year. During fiscal 2021, we recorded $4.5 million in research and development incentive income, consisting of the Australian research and development incentive credit administered through the Australian Tax Office, in connection with fiscal 2021 eligible expenditures and fiscal 2020 expenditures for which an overseas finding ruling was obtained during the current year. In comparison, research and development incentive income for fiscal 2020 was $4.4 million in connection with fiscal 2020 eligible expenditures. We expect to continue to receive support from the Australian government for various clinical trials being conducted within Australia. Net loss Net loss for fiscal 2021 was $37.9 million, or $0.54 per share, compared to a net loss of approximately $26.3 million, or $0.45 per share for fiscal 2020. 39 Liquidity and Capital Resources Working Capital [[GREPCENT_TABLE]] [["","","2021","","","2020"],["Current Assets","","$","161,616,490","","","","$","34,542,197"],["Current Liabilities","","","10,798,386","","","","","7,305,628"],["Working Capital","","$","150,818,104","","","","$","27,236,569"]] [[/GREPCENT_TABLE]] At September 30, 2021, we had $152.1 million in cash and cash equivalents, an increase of $122.9 million, from $29.2 million at September 30, 2020. The principal reason for this increase is due to cash received from financing activities of $153.2 million from the issuance of common shares, offset by cash utilized in operations of $30.4 million. We intend to continue to use our capital resources to advance our clinical trials for ANAVEX®2-73 and ANAVEX®3-71, and to perform work necessary to prepare for future development of our pipeline compounds. Cash Flows [[GREPCENT_TABLE]] [["","","2021","","2020"],["Cash flows used in operating activities","","$","(30,383,674",")","","$","(21,287,046",")"],["Cash flows provided by financing activities","","","153,242,401","","","","28,350,434"],["Increase in cash","","$","122,858,727","","","$","7,063,388"]] [[/GREPCENT_TABLE]] Cash flow used in operating activities There was an increase in cash used in operating activities of $9.1 million during fiscal 2021 due to an increase in clinical trial activities, as more fully described above. Cash flow provided by financing activities Cash provided by financing activities in fiscal 2021 was $153.2 million, net of financing costs, primarily attributable to cash received from the issuance of common shares at various market prices under the 2019 Purchase Agreement, the Sales Agreement and a direct registered offering we completed for net proceeds of $46.9 million, after deducting expenses associated with the offering. Cash provided by financing activities in fiscal 2020 were $28.4 million, attributable to cash received from the issuance of common shares at various market prices under the 2019 Purchase Agreement and under the Sales Agreement. Other Financings Purchase Agreement On June 7, 2019, we entered into a Purchase Agreement (the “2019 Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), as amended on July 1, 2020, pursuant to which Lincoln Park committed to purchase up to $50.0 million of our common stock. Concurrently with the execution of the 2019 Purchase Agreement in 2019, we issued 324,383 shares of our common stock to Lincoln Park as a fee for its commitment to purchase shares of our common stock under the 2019 Purchase Agreement and became obligated to issue up to 162,191 shares pro rata, when and if Lincoln Park purchased, at our discretion, the $50.0 million aggregate commitment. During fiscal year 2021, the Company issued to Lincoln Park an aggregate of 4,086,209 shares of common stock under the 2019 Purchase Agreement, including 4,007,996 shares of common stock for an aggregate purchase price of $24.1 million and 78,213 commitment shares. As of September 30, 2021, no shares of our common stock remain available for purchase by Lincoln Park under the 2019 Purchase Agreement. 40 Controlled Equity Offering Sales Agreement On May 1, 2020, we entered into an Amended and Restated Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co. and SVB Leerink LLC (the “Sales Agents”), pursuant to which we may offer and sell shares of common stock registered under an effective registration statement from time to time through the Sales Agents (the “At-the-Market Offering”). Upon delivery of a placement notice based on our instructions and subject to the terms and conditions of the Sales Agreement, the Sales Agents may sell shares of common stock by methods deemed to be an “at the market offering”, in negotiated transactions at market prices prevailing at the time of sale or at prices related to such prevailing market prices, or by any other method permitted by law, including negotiated transactions, subject to our prior written consent. We are not obligated to make any sales of shares under the Sales Agreement. We or the Sales Agents may suspend or terminate the At-the-Market Offering upon notice to the other party, subject to certain conditions. The Sales Agents will act as agents on a commercially reasonable efforts basis consistent with their normal trading and sales practices and applicable state and federal law, rules and regulations and the rules of Nasdaq. We have agreed to pay the Sales Agents commissions for their services of 3.0% of the gross proceeds from the sale of the Shares pursuant to the Sales Agreement. We have also agreed to provide the Sales Agents with customary indemnification and contribution rights. During fiscal 2021, 5,634,576 shares were sold pursuant to the At-the-Market Offering for gross proceeds of $79.1 million (net proceeds of $76.7 million after deducting commissions and offering expenses). Registered Direct Offering On June 24, 2021, the Company completed a registered direct offering off of the Company’s shelf registration statement on Form S-3 filed with the SEC on July 3, 2019. The Company issued 2,380,953 common shares at $21.00 per share for gross proceeds of $50.0 million (net proceeds of $46.9 million after deducting offering fees and expenses). Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders. Application of Critical Accounting Policies Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management’s application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our financial statements is critical to an understanding of our financial statements. We base our assumptions and estimates on historical experience and other sources that we believe to be reasonable at the time. Actual results may vary from our estimates due to changes in circumstances, politics, global economics, general business conditions and other factors. Our significant estimates are related to the valuation of warrants and options. There are accounting policies that we believe are significant to the presentation of our financial statements. The most significant of these accounting policies relates to the accounting for our research and development expenses and stock-based compensation expense. 41 Research and Development Expenses Research and development costs are expensed as incurred. These expenses are comprised of the costs of the Company’s proprietary research and development efforts, including preclinical studies, clinical trials, manufacturing costs, employee salaries and benefits and stock based compensation expense, contract services including external research and development expenses incurred under arrangements with third parties such as contract research organizations (“CROs”), facilities costs, overhead costs and other related expenses. Milestone payments made by the Company to third parties are expensed when the specific milestone has been achieved. Manufacturing costs are expensed as incurred in accordance with Accounting Standard Codification (“ASC”) 730, Research and Development, as these materials have no alternative future use outside of their intended use. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and amortized over the period that the goods are delivered, or the related services are performed, subject to an assessment of recoverability. The Company makes estimates of costs incurred in relation to external CROs, and clinical site costs. The Company analyzes the progress of clinical trials, including levels of patient enrollment, invoices received and contracted costs when evaluating the adequacy of the amount expensed and the related prepaid asset and accrued liability. Judgments and estimates must be made and used in determining the accrued balance and expense in any accounting period. The Company reviews and accrues CRO expenses and clinical trial study expenses based on work performed and relies upon estimates of those costs applicable to the stage of completion of a study. Accrued CRO costs are subject to revisions as such trials progress to completion. Revisions are charged to expense in the period in which the facts that give rise to the revision become known. With respect to clinical site costs, the financial terms of these agreements are subject to negotiation and vary from contract to contract. Payments under these contracts may be uneven and depend on factors such as the achievement of certain events, the successful recruitment of patients, the completion of portions of the clinical trial or similar conditions. The objective of our policy is to record expenses in our financial statements based on actual services received and efforts expended. As such, expense accruals related to clinical site costs are recognized based on our estimate of the degree of completion of the event or events specified in the specific clinical study or trial contract. In addition, we incur expenses in respect of the acquisition of intellectual property relating to patents and trademarks. The probability of success and length of time to develop commercial applications of the drugs subject to the acquired patents and trademarks is difficult to determine and numerous risks and uncertainties exist with respect to the timely completion of the development projects. There is no assurance the acquired patents and trademarks will ever be successfully commercialized. Due to these risks and uncertainties, we expense the acquisition of patents and trademarks. Stock-based Compensation We account for all stock-based payments and awards under the fair value-based method. The fair value of all share purchase options and warrants are expensed over their contractual vesting period, or over the expected performance period for only the portion of awards expected to vest, in the case of milestone-based vesting, with a corresponding increase to additional paid-in capital. Compensation costs for stock-based payments with graded vesting are recognized on a straight-line basis. Stock based compensation expense is adjusted for actual forfeitures of unvested awards as they occur. We have granted share purchase option awards that vest upon achievement of certain performance criteria, or milestone-based awards. We estimate an implicit service period for achieving performance criteria for each award and recognizes the resulting fair value as expense over the implicit service period when we conclude that achieving the performance criteria is probable. We periodically review and update, as appropriate, our estimates of implicit service periods and conclusions on achieving the performance criteria. Performance awards vest upon achievement of the performance criteria.  42 We use the Black-Scholes option valuation model to calculate the fair value of share purchase options and warrants at the date of the grant. This model requires the input of subjective assumptions, including the expected price volatility, expected life and estimated forfeitures of each award. We use the U.S. Treasury daily treasury yield curve rates for the expected term of the option as the risk-free rate. The expected term represents the period that options granted are expected to be outstanding using the simplified method. Our historical share option exercise experience does not provide a reasonable basis for estimating the expected term. Expected volatility is based on the average of the daily share price changes over the expected term. We do not estimate forfeitures and elect to record actual forfeitures as they occur. We have not paid any dividends on our common stock historically, therefore no assumption of dividend payments is made in the model. These assumptions consist of estimates of future market conditions, which are inherently uncertain, and therefore, are subject to management’s judgment. Changes in these assumptions can materially affect the fair value estimates. The purchase price of options or warrants may be paid in cash or, if approved by our compensation committee in advance, “net settled” in shares of our common stock. In a net settlement of an option or warrant, we do not receive payment of the exercise price from the holder but reduce the number of shares of common stock issued upon the exercise of the stock option or warrant by the smallest number of whole shares that have an aggregate fair market value equal to or over the aggregate exercise price for the option shares covered by the option or warrant being exercised. Shares issued pursuant to the exercise of options and warrants are issued from our treasury. RECENT ACCOUNTING PRONOUNCEMENTS For a discussion of recent accounting pronouncements and their possible effect on our results, see Note 2(n) to our Consolidated Financial Statements found elsewhere in this Annual Report.