# ANAVEX LIFE SCIENCES CORP. (AVXL) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from ANAVEX LIFE SCIENCES CORP.'s 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1314052/000173112223002197/e5240_10k.htm Accession: 0001731122-23-002197 Filing date: 2023-11-27 Report date: 2023-09-30 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/fy2022/ (FY 2022) Next year: /company/AVXL/mda/fy2024/ (FY 2024) 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. 61 Financial Operations 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. 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. Comparison of year ended September 30, 2023 to year ended September 30, 2022 Operating Expenses Our operating expenses for fiscal 2023 increased to $55.8 million, from $51.0 million in fiscal 2022. The increase is attributable to an increase in research and development expenses of $5.7 million in 2023 to $43.7 million. The following table summarizes our research and development expenses for the years ended September 30, 2023, and 2022 (in thousands): [[GREPCENT_TABLE]] [["","","2023","","2022"],["Costs of external service providers","","$","22,542","","","$","18,102"],["Personnel costs","","","10,264","","","","8,012"],["Stock-based compensation","","","10,812","","","","11,250"],["License fees","","","\u2014","","","","500"],["Other common costs","","","99","","","","52"],["Total research and development costs","","$","43,717","","","$","37,916"]] [[/GREPCENT_TABLE]] External service providers cost by product candidate was as follows (in thousands): [[GREPCENT_TABLE]] [["","","2023","","2022"],["ANAVEX\u00ae2-73","","$","19,540","","","$","15,510"],["ANAVEX\u00ae3-71","","","2,624","","","","2,251"],["All other product candidates","","","6","","","","298"],["Other external service provider costs","","","372","","","","43"],["Total external service provider costs","","$","22,542","","","$","18,102"]] [[/GREPCENT_TABLE]] The increase in external service provider costs from fiscal 2022 to fiscal 2023 is primarily due to (1) an increase in manufacturing costs for both ANAVEX®2-73 and ANAVEX®3-71, in preparation for planned clinical trials or studies and (2) an increase in clinical trial expenditures related to our Rett program in connection with the completed enrollment and dosing of our Phase 2/3 Excellence pediatric clinical trial. During fiscal 2023, our personnel costs increased to $10.3 million from $8.0 million as a result of our expanded team. However, this was offset by a decrease in stock-based compensation expense as a result of the vesting of previously awarded milestone-based option awards. 62 General and administrative expenses for fiscal 2023 decreased to $12.0 million, from $13.1 million in fiscal 2022, most significantly related to a decrease in non-cash stock option compensation charges as a result of the vesting of previously awarded milestone-based option awards. During fiscal 2023, we utilized cash and cash equivalents of $27.8 million to fund our operations, compared to $24.2 million during fiscal 2022. Our cash position increased slightly to $151.0 million at September 30, 2023, an increase of $1.9 million over the prior year. Cash for operations was generated through the issuance of shares of common stock under the financing arrangements described below. We expect to continue to see an increase in our research and development expenditures as we advance our ANAVEX®2-73 clinical studies, including planned advancement of ANAVEX®2-73 for Parkinson’s disease 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) Net other income for the year ended September 30, 2023 was $8.3 million as compared to $3.4 million for fiscal 2022. The primary reason for the increase in other income was due to an increase in interest income earned on cash and cash equivalents, due to an increase in market wide interest rates year over year. During fiscal 2023, we recorded $2.7 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 2023 eligible expenditures. In comparison, research and development incentive income for fiscal 2022 was $3.3 million in connection with fiscal 2022 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 2023 was $47.5 million, or $0.60 per share, compared to a net loss of approximately $48.0 million, or $0.62 per share for fiscal 2022. Liquidity and Capital Resources Working Capital (in thousands) [[GREPCENT_TABLE]] [["","","2023","","2022"],["Current Assets","","$","154,386","","","$","152,705"],["Current Liabilities","","","12,534","","","","10,214"],["Working Capital","","$","141,852","","","$","142,491"]] [[/GREPCENT_TABLE]] At September 30, 2023, we had $151.0 million in cash and cash equivalents, an increase from $149.2 million at September 30, 2022. We intend to continue to use our capital resources to advance our clinical trials for ANAVEX®2-73 and ANAVEX®3-71, and to perform work necessary to prepare for future development of our pipeline compounds. Cash Flows Following is a summary of sources of cash flows for the years ended September 30, 2023 and 2022 (in thousands) [[GREPCENT_TABLE]] [["","","2023","","2022"],["Cash flows used in operating activities","","$","(27,785",")","","$","(24,238",")"],["Cash flows provided by financing activities","","","29,651","","","","21,288"],["Increase (decrease) in cash","","$","1,866","","","$","(2,950",")"]] [[/GREPCENT_TABLE]] 63 Cash flow used in operating activities There was an increase in cash used in operating activities of $1.9 million during fiscal 2023 primarily due to the collection of incentive and tax receivables in the comparable period. Cash flow provided by financing activities Cash provided by financing activities in fiscal 2023 was $29.7 million, primarily attributable to cash received from the issuance of common shares at various market prices under the 2023 Purchase Agreement (as defined below). 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. Other Financings 2023 Purchase Agreement On February 3, 2023, the Company entered into a $150,000,000 purchase agreement (the “2023 Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which the Company has the right to sell and issue to Lincoln Park, and Lincoln Park is obligated to purchase, up to $150.0 million in value of its shares of Common Stock from time to time over a three-year period until February 3, 2026. On any business day and subject to certain customary conditions, the Company may direct Lincoln Park to purchase up to 200,000 shares of Common Stock (such purchases, “Regular Purchases”). The amount of a Regular Purchase may increase under certain circumstances based on the market price of the Common Stock; provided, however, that Lincoln Park’s committed obligation under any Regular Purchase shall not exceed $4.0 million. The purchase price of shares of Common Stock will be based on the then prevailing market prices of such shares at the time of sales as described in the Purchase Agreement. There are no limits on the price per share that Lincoln Park may pay to purchase Common Stock under the Purchase Agreement. In addition, if the Company has directed Lincoln Park to purchase the full amount of Common Stock available as a Regular Purchase on a given day, it may direct Lincoln Park to purchase additional amounts as “accelerated purchases” and “additional accelerated purchases,” each as set forth in the Purchase Agreement. The Purchase Agreement limits the Company’s sale of shares of Common Stock to Lincoln Park to 15,606,426 shares of Common Stock, representing 19.99% of the shares of the Common Stock outstanding on the date of the Purchase Agreement unless (i) stockholder approval is obtained to issue more than such amount or (ii) the average price of all applicable sales of Common Stock to Lincoln Park under the Purchase Agreement equals or exceeds the lower of (A) the closing price of the Common Stock on the Nasdaq Capital Market immediately preceding the Execution Date or (B) the average of the closing price of the Common Stock on the Nasdaq Capital Market for the five Business Days immediately preceding the Execution Date. The Purchase Agreement also prohibits the Company from directing Lincoln Park to purchase any shares of Common Stock if those shares, when aggregated with all other shares of Common Stock then beneficially owned by Lincoln Park and its affiliates, would result in Lincoln Park and its affiliates having beneficial ownership, at any single point in time, of more than 4.99% of the then total outstanding shares of Common Stock, as calculated pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended, and Rule 13d-3 thereunder. In consideration for entering into the 2023 Purchase Agreement, the Company issued to Lincoln Park 75,000 shares of Common Stock as a commitment fee (the “initial commitment shares”) during the year ended September 30, 2023 and agreed to issue up to 75,000 shares pro rata (collectively with the initial commitment shares, the “commitment shares”), when and if, Lincoln Park purchased, at the Company’s discretion, the $150.0 million aggregate commitment. 64 During the year ended September 30, 2023, the Company issued to Lincoln Park an aggregate of 3,288,943 (2022: 0) shares of Common Stock under the 2023 Purchase Agreement, including 3,275,000 (2022: 0) shares of Common Stock for aggregate proceeds of $27.9 million (2022: $0) and 88,943 (2022: 0) commitment shares (inclusive of the 75,000 initial commitment shares). As of September 30, 2023, an amount of $122.1 million in shares of our common stock remain available for purchase by Lincoln Park under the 2023 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. No shares were sold during the year ended September 30, 2023 under the Sales Agreement. The Company currently does not have access to sell shares of common stock with the Sales Agents. During the year ended September 30, 2022, 1,623,813 shares were sold under the Sales Agreement for gross proceeds of $21.0 million (net proceeds of $20.3 million after deducting commissions and offering expenses). 2019 Purchase Agreement On June 7, 2019, we entered into a Purchase Agreement (the “2019 Purchase Agreement”) with 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, 2023 and 2022, no shares of our common stock remained available for purchase by Lincoln Park under the 2019 Purchase Agreement. 65 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. 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 66 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.