# ANAVEX LIFE SCIENCES CORP. (AVXL) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ANAVEX LIFE SCIENCES CORP.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1314052/000173112222002062/e4251_10k.htm
Accession: 0001731122-22-002062
Filing date: 2022-11-28
Report date: 2022-09-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/AVXL/
All MD&A years: /company/AVXL/mda/
Previous year: /company/AVXL/mda/fy2021/ (FY 2021)
Next year: /company/AVXL/mda/fy2023/ (FY 2023)

ITEM 7 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion should be read
in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this report. Past operating
results are not necessarily indicative of results that may occur in future periods. This discussion contains forward-looking statements,
which involve a number of risks and uncertainties. See Forward Looking Statements included elsewhere in this report.

This section discusses year over year comparisons
for the fiscal years ended September 30, 2022 and 2021. Discussion of year over year comparisons between the fiscal years ended September
30, 2021 and 2020 have been excluded from this Form 10-K and can be found in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended September
30, 2021.

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 trials 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 trials. 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.

General and administrative expenses
consist of personnel costs, expenses for outside professional services and expenses 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
stockholder relations activities and other administrative expenses and professional services.

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Year ended September 30, 2022

During fiscal 2022, we advanced our business and clinical trials
through the following events:

[[GREPCENT_TABLE]]
[["","\u25cf","In January 2022, we reported positive top-line results from the placebo-controlled Phase 1 clinical trial (ANAVEX\u00ae3-71-001) in development for the treatment of neurodegenerative diseases including Frontotemporal Dementia (FTD), for which ANAVEX\u00ae3-71 has been granted Orphan Drug Designation by the FDA. The trial achieved primary and secondary safety endpoints."],["","\u25cf","In February 2022, we reported positive top-line results from the second randomized, placebo-controlled AVATAR Phase 3 clinical trial (ANAVEX\u00ae2-73-RS-002) for the treatment of adult patients with Rett syndrome. The trial met its primary and secondary efficacy and safety endpoints, with consistent and clinically meaningful improvements in all efficacy measures."],["","\u25cf","In April 2022, we completed the last patient visit in the 48-week open label extension of the Parkinson\u2019s Disease Dementia Phase 2 clinical trial."],["","\u25cf","In June 2022, the last patient last visit in the randomized, placebo-controlled Phase 2b/3 clinical trial ANAVEX\u00ae2-73-AD-004 for the treatment of early Alzheimer\u2019s disease occurred. We expect to present top line data at the upcoming Clinical Trial on Alzheimer\u2019s Disease (CTAD) Congress 2022 in San Francisco, CA."],["","\u25cf","Throughout fiscal 2022, we made significant progress in the randomized, placebo-controlled EXCELLENCE Phase 2/3 clinical trial ANAVEX\u00ae2-73-RS-003 for the treatment of pediatric patients with Rett syndrome with expansion of enrollment into clinical sites across Canada and the United Kingdom."]]
[[/GREPCENT_TABLE]]

Operating Expenses

Our operating expenses for fiscal 2022 increased to $51.0 million, from $42.0
million in fiscal 2021. The increase is attributable to an increase in research and development expenses of $4.9 million in 2022 to $37.9
million, as described below.

The following table summarizes our research and development
expenses for the years ended September 30, 2022, and 2021 (in thousands):

[[GREPCENT_TABLE]]
[["","","2022","","2021"],["Costs of external service providers","","$","18,102","","","$","21,243"],["Personnel costs","","","8,012","","","","6,987"],["Stock-based compensation","","","11,250","","","","4,660"],["License fees","","","500","","","","\u2014"],["Other common costs","","","52","","","","94"],["Total research and development costs","","$","37,916","","","$","32,984"]]
[[/GREPCENT_TABLE]]

During fiscal 2022, external service
providers costs by product candidate were as follows (in thousands):

[[GREPCENT_TABLE]]
[["ANAVEX\u00ae2-73","","$","15,510"],["ANAVEX\u00ae3-71","","","2,251"],["All other product candidates","","","298"],["Other external service provider costs","","","43"],["Total external service provider costs","","$","18,102"]]
[[/GREPCENT_TABLE]]

The
decrease in external service provider costs from fiscal 2021 to fiscal 2022 is related to a decrease in clinical trial expenditures over
the comparable period, associated with the completion of the enrollment and recruitment activities for our Phase 2b/3 trial in Alzheimer’s
disease, and manufacturing activities in the comparable period associated with the Rett syndrome program. This decrease was offset by
an increase in personnel costs and non-cash stock-based compensation associated with an expanding team directly engaged in support of
ongoing research and development activities.

General and administrative expenses for
fiscal 2022 increased to $13.1 million, from $9.0 million in fiscal 2021, most significantly related to an increase in personnel and
an increase in associated non-cash stock option compensation charges.

During
fiscal 2022, we utilized cash and cash equivalents of $24.2 million to fund our operations, compared to $30.4 million during fiscal 2021.
Our cash position decreased to $149.2 million at September 30, 2022, a decrease of $2.9 million over the prior year. Cash for operations
was generated through the issuance of shares of common stock under the financing arrangements described below.

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We will continue to see an increase in our research and development expenditures as we advance our ANAVEX®2-73
clinical trials, including planned advancement of ANAVEX®2-73 for Parkinson’s disease program, planned initiation
of a Fragile X clinical program, ongoing extension studies of our current clinical programs, continued advancement of our other
pipeline compounds such as ANAVEX®3-71, and as we continue to add additional staffing to manage and support these
clinical initiatives.

Other income

Net other income for the year ended September
30, 2022 was $3.4 million as compared to $4.4 million for fiscal 2021. The primary reason for the decrease in other income was due to
a decrease in research and development incentive income and 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. The decrease was offset by an increase in interest income.

During fiscal 2022, we recorded $3.3 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 2022 eligible expenditures. In comparison, research and development incentive income
for fiscal 2021 was $4.5 million in connection with fiscal 2021 eligible expenditures and fiscal 2020 expenditures for which an overseas
finding ruling was obtained during fiscal 2021. 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 2022 was $48.0 million,
or $0.62 per share, compared to a net loss of approximately $37.9 million, or $0.54 per share for fiscal 2021.

Liquidity and Capital Resources

Working Capital

[[GREPCENT_TABLE]]
[["","","2022","","2021"],["Current Assets","","$","152,704,603","","","$","161,616,490"],["Current Liabilities","","","10,213,561","","","","10,798,386"],["Working Capital","","$","142,491,042","","","$","150,818,104"]]
[[/GREPCENT_TABLE]]

At September 30, 2022, we had $149.2 million
in cash and cash equivalents, a decrease of $2.9 million, from $152.1 million at September 30, 2021. The decrease in cash and cash equivalents
during the year is a result of cash utilized in operations, partially offset by cash provided by financing activities, as described below.

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]]
[["","","2022","","2021"],["Cash flows used in operating activities","","$","(24,237,864",")","","$","(30,383,674",")"],["Cash flows provided by financing activities","","","21,287,980","","","","153,242,401"],["Increase (decrease) in cash","","$","(2,949,884",")","","$","122,858,727"]]
[[/GREPCENT_TABLE]]

Cash flow used in operating activities

There was a decrease in cash used in operating
activities of $6.1 million during fiscal 2022 primarily due to the collection of incentive and tax receivables.

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Cash flow provided by financing activities

Cash provided by financing activities
in fiscal 2022 was $21.3 million, net of financing costs, primarily attributable to cash received from
the issuance of common shares at various market prices under the Sales Agreement.

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. 

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, 2022 and 2021, no shares of our common stock remain available for purchase by Lincoln Park under the 2019 Purchase
Agreement.

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,
applicable state and federal law, and 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 shares of common stock pursuant to the Sales Agreement. We have
also agreed to provide the Sales Agents with customary indemnification and contribution rights.

During fiscal 2022, 1,623,813 shares were sold
pursuant to the At-the-Market Offering for gross proceeds of $21.0 million (net proceeds of $20.3 million after deducting offering
expenses).

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).

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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.

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. Significant 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 trial contract.

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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.

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, and expected life of each award. 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.

RECENT ACCOUNTING PRONOUNCEMENTS

For a discussion of recent accounting
pronouncements and their possible effect on our results, see Note 2 to our Consolidated Financial Statements found elsewhere in this
Annual Report.