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.
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.
Liquidity and Capital Resources
Working Capital
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
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.
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.
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.
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.
ITEM 7A QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
ANAVEX LIFE SCIENCES CORP.
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
Report of Independent Registered Public
Accounting Firm
Shareholders and Board of Directors
Anavex Life Sciences Corp.
New York, New York
Opinion on the Consolidated
Financial Statements
We have audited the accompanying
consolidated balance sheets of Anavex Life Sciences Corp. (the “Company”) as of September 30, 2021 and 2020, the related
consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the two years
in the period ended September 30, 2021, and the related notes (collectively referred to as the “consolidated financial statements”).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company
at September 30, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended
September 30, 2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal
control over financial reporting as of September 30, 2021, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our
report dated November 24, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to
assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising
from the current period audit of the consolidated financial statements that were communicated or required to be communicated to
the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements
and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ BDO USA, LLP
We have served as the Company’s auditor
since 2013.
New York, New York
November 24, 2021
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Anavex Life Sciences Corp.
New York, New York
Opinion on Internal Control over Financial
Reporting
We have audited Anavex Life Sciences Corp.’s
(the “Company’s”) internal control over financial reporting as of September 30, 2021, based on criteria established
in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2021, based on the COSO criteria.
We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets
of the Company as of September 30, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, stockholders’
equity, and cash flows for each of the two years in the period ended September 30, 2021, and the related notes, and our report
dated November 24, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control
over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control
over Financial Reporting
A company’s internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
New York, New York
November 24, 2021
ANAVEX LIFE SCIENCES CORP.
CONSOLIDATED BALANCE SHEETS
As at September 30,
2021 and 2020
Assets
Current
Deferred financing charges 16,365 —
Liabilities and Stockholders' Equity
Current Liabilities
Deferred grant income 443,831 —
Commitments and Contingencies - Note 6
Capital stock
Authorized:
Issued and outstanding:
See Accompanying Notes to Consolidated Financial Statements
ANAVEX LIFE SCIENCES CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
For
the years ended September 30, 2021 and 2020
Operating expenses
Other income (expenses)
Net Loss per share
Basic and diluted $ (0.54 ) $ (0.45 )
Weighted average number of shares outstanding
See Accompanying Notes to Consolidated Financial Statements
ANAVEX LIFE SCIENCES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September
30, 2021 and 2020
Cash Flows used in Operating Activities
Adjustments to reconcile net loss to net cash used in operations:
Changes in non-cash working capital balances related to operations:
Deferred grant income 443,831 —
Cash Flows provided by Financing Activities
Proceeds from exercise of warrants 1,466,500 —
Proceeds from exercise of stock options 4,108,060 —
Supplemental Cash Flow Information
Cash paid for state and local minimum income taxes $ 139,531 $ 22,664
See Accompanying Notes to Consolidated Financial Statements
ANAVEX LIFE SCIENCES CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the
years ended September 30, 2021 and 2020
Common Stock
Additional
Paid-in Accumulated
Shares Par Value Capital Deficit Total
Shares issued under 2019 purchase agreement
Shares issued pursuant to cashless exercise of stock options 721 1 (1 ) — —
See Accompanying Notes to Consolidated Financial Statements
Anavex Life Sciences Corp.
Notes to the Consolidated Financial Statements
September 30, 2021 – Page 1
Note 1 Business Description and Basis of
Presentation
Business
Anavex Life Sciences Corp. (“Anavex”
or the “Company”) is a clinical stage biopharmaceutical company engaged in the development
of differentiated therapeutics by applying precision medicine to central nervous system (“CNS”) diseases with high
unmet need. Anavex analyzes genomic data from clinical studies to identify biomarkers, which are used to select patients that will
receive the therapeutic benefit for the treatment of neurodegenerative and neurodevelopmental diseases. The Company’s
lead compound ANAVEX®2-73 is being developed to treat Alzheimer’s disease, Parkinson’s
disease and potentially other central nervous system diseases, including rare diseases, such as Rett syndrome, a rare severe neurological
monogenic disorder caused by mutations in the X-linked gene, methyl-CpG-binding protein 2 (“MECP2”).
On May 25, 2021, the Company filed
a Certificate of Amendment to its Articles of Incorporation with the Secretary of the State of Nevada effecting an amendment to
increase the number of authorized shares of the Company’s common stock, par value $0.001 per share, from 100,000,000 shares
to 200,000,000 shares. The Certificate of Amendment was approved by the Company’s stockholders at an annual meeting of stockholders
on May 25, 2021.
Basis of
Presentation
These consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and the
instructions to Form 10-K and have been prepared under the accounting principles generally accepted in the United States of America
(“U.S. GAAP”).
Liquidity
All of the Company’s potential
drug compounds are in the clinical development stage and the Company cannot be certain that its research and development efforts
will be successful or, if successful, that its potential drug compounds will ever be approved for sale or generate commercial revenues.
To date, we have not generated any revenues from our operations. The Company expects the business to continue to experience negative
cash flows for the foreseeable future and cannot predict when, if ever, its business might become profitable.
Management believes that the current
working capital position will be sufficient to meet the Company’s working capital requirements beyond the next 12 months
after the date that these consolidated financial statements are issued. The process of drug development can be costly, and the
timing and outcomes of clinical trials is uncertain. The assumptions upon which the Company has based its estimates are routinely
evaluated and may be subject to change. The actual amount of the Company’s expenditures will vary depending upon a number
of factors including but not limited to the design, timing and duration of future clinical trials, the progress of the Company’s
research and development programs and the level of financial resources available. The Company has the ability to adjust its operating
plan spending levels based on the timing of future clinical trials.
Other than our rights related to
the Sales Agreement (as defined below in Note 5), there can be no assurance that additional financing will be available to us when
needed or, if available, that it can be obtained on commercially reasonable terms. If the Company is not able to obtain the additional
financing on a timely basis, if and when it is needed, it will be forced to delay or scale down some or all of its research and
development activities.
Anavex Life Sciences Corp.
Notes to the Consolidated Financial Statements
September 30, 2021 – Page 2
Note 1 Business Description and Basis of
Presentation – Continued
Coronavirus Disease 2019 (COVID-19)
The recent global outbreak of COVID-19
has not had a material impact on the Company’s result of operations or financial condition for the year ended September 30,
2021. However, the pandemic continues to rapidly evolve as of the date these consolidated financial statements are issued and has
created a dynamic and uncertain situation in the global economy. As such, it is uncertain as to the full magnitude that the outbreak
will have on the Company’s financial condition and future results of operations. Management is actively monitoring the global
situation on its business, including on its clinical trials and operations and financial condition. Given the daily evolution of
the COVID-19 situation, and the global responses to curb its spread, the Company is not able to estimate the effects COVID-19 may
have on its future results of operations or financial condition.
Note 2 Summary of Significant Accounting Policies
a) Use of Estimates
The preparation of financial statements
in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. The
Company regularly evaluates estimates and assumptions related to accounting for research and development costs, incentive income
receivable, valuation and recoverability of deferred tax assets, asset impairment, stock-based compensation and loss contingencies.
The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes
to be reasonable under the circumstances, the results of which form the basis for making judgments about the book values of assets
and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced
by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences
between the estimates and the actual results, future results of operations will be affected.
b) Principles of Consolidation
These consolidated financial statements
include the accounts of Anavex Life Sciences Corp. and its wholly-owned subsidiaries, Anavex Australia Pty Limited. (“Anavex
Australia”), a company incorporated under the laws of Australia, Anavex Germany GmbH, a company incorporated under the laws
of Germany, and Anavex Canada Ltd., a company incorporated under the laws of the Province of Ontario, Canada. All inter-company
transactions and balances have been eliminated.
c) Cash and equivalents
The
Company considers only those investments which are highly liquid, readily convertible to cash and that mature within three months
from the date of purchase to be cash equivalents.
Highly liquid investments
that are considered cash equivalents include money market accounts, money market funds and certificates of
deposit. The carrying value of cash equivalents approximates fair value due to the short-term maturity of these securities. The
Company’s investment policy allows for investments in domestic money market certificates, certificates of deposit,
money market funds, commercial papers, bonds or commercial papers, and establishes diversification and credit quality requirements
and limits investments by maturity and issuer. The Company currently maintains its investments at one large well known financial
institution.
Anavex Life Sciences Corp.
Notes to the Consolidated Financial Statements
September 30, 2021 – Page 3
Note 2 Summary of Significant Accounting Policies –
(continued)
c) Cash and equivalents – (continued)
The Company maintains
its cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are guaranteed by the Federal
Deposit Insurance Corporation (FDIC) up to $250,000, under current regulations. The Company mitigates this risk by maintaining
its cash balances in a large well known financial institutions.The Company has not experienced any losses in such accounts.
d) 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. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies including the
phase or completion of events, invoices received and contracted costs. Judgments and estimates are made in determining
the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates. The Company’s
historical accrual estimates have not been materially different from actual costs.
In addition, the Company incurs
expenses in respect of intellectual property costs relating to patents and trademarks. The probability of success and length of
time to develop commercial applications of the drugs subject to the underlying patent and trademark costs 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 drugs subject to the underlying patents and trademarks will ever be successfully commercialized.
Due to these risks and uncertainties,
the patent and trademark costs do not meet the definition of an asset and thus are expensed as incurred within general and administrative
expenses.
Anavex Life Sciences Corp.
Notes to the Consolidated Financial Statements
September 30, 2021 – Page 4
Note 2 Summary of Significant Accounting Policies –
(continued)
e) Research and Development Incentive Income
The Company is eligible to obtain
certain research and development tax credits, including the Australian research and development tax incentive credit (the “Australia
R&D credit”) through a program administered through the Australian Tax Office (the “ATO”), which provides
for a cash refund based on a percentage of certain research and development activities undertaken in Australia by the Company’s
wholly owned subsidiary, Anavex Australia Pty Ltd. (“Anavex Australia”). The cash refund is available to eligible companies
with an annual aggregate revenue of less than $20.0 million Australian during the reimbursable period.
The tax incentives are available
on the basis of specific criteria with which the Company must comply. Although the tax incentive may be administered through the
local tax authority, the Company has accounted for the incentives outside of the scope of ASC Topic 740, Income Taxes (“ASC
740”), since the incentives are not linked to the Company’s taxable income and can be realized regardless of whether
the Company has generated taxable income in the respective jurisdictions.
With respect to the Australia R&D
credit, Anavex Australia may be eligible to receive the cash refund for certain research and development expenses incurred by Anavex
Australia outside of Australia, to the extent such expenses are pre-approved by the Australian authority pursuant to an advanced
overseas finding application. The Company accrues for the amount of cash refund it expects to receive in relation to research and
development expenses outside of Australia only to the extent it has received advanced approval from the Department of Industry,
Innovation and Science in Australia, pursuant to an approved advanced overseas finding application.
In addition, Anavex Australia and
Anavex Canada incur Goods and Services Tax (GST) on certain services provided by local vendors. As a domestic entity in those jurisdictions,
Anavex Australia and Anavex Canada are entitled to a refund of the GST paid. Similarly, Anavex Germany incurs Value Added Tax (VAT)
on certain services provided by local vendors, to which it is entitled to a refund of such VAT paid. The Company’s estimate
of the amount of cash refund it expects to receive related to GST and VAT incurred is included in Incentive and tax receivables
in the accompanying consolidated balance sheets.
f) Basic and Diluted Loss per Share
Basic income/(loss) per common
share is computed by dividing net income/(loss) available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted income/(loss) per common share is computed by dividing net income/(loss) available to common
stockholders by the sum of (1) the weighted-average number of common shares outstanding during the period, (2) the dilutive effect
of the assumed exercise of options and warrants using the treasury stock method and (3) the dilutive effect of other potentially
dilutive securities. For purposes of the diluted net loss per share calculation, options and warrants are potentially dilutive
securities and are excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive.
Anavex Life Sciences Corp.
Notes to the Consolidated Financial Statements
September 30, 2021 – Page 5
Note 2 Summary of Significant Accounting Policies –
(continued)
f) Basic and Diluted Loss per Share – (continued)
As of September 30, 2021, diluted
loss per share excludes 11,540,903 (2020 – 10,576,266) potentially dilutive common shares related to outstanding options
and warrants, as their effect was anti-dilutive.
g) Financial Instruments
The book value of the Company’s
financial instruments, consisting of cash and equivalents, incentive and tax receivables, and accounts payable and accrued liabilities
approximate their fair value due to the short-term maturity of such instruments. Unless otherwise noted, it is management’s
opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments.
h) Foreign Currency Translation
The functional currency of the
Company is the US dollar. Monetary items denominated in a foreign currency are translated into US dollars at exchange rates prevailing
at the balance sheet date and non-monetary items are translated at exchange rates prevailing when the assets were acquired, or
obligations incurred. Foreign currency denominated expense items are translated at exchange rates prevailing on the transaction
date. Unrealized gains or losses arising from the translations are credited or charged to income in the period in which they occur.
The Company has determined that
the functional currency of Anavex Australia Pty Limited, Anavex Germany GmbH, and Anavex Canada Ltd. is also the US dollar.
i) Segment and Geographic Reporting
Operating segments are defined
as components of an enterprise for which separate discrete information is available for evaluation by the chief operating decision
maker or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations
and manages its business as one operating segment, which is the business of developing novel therapies for the management of CNS
diseases.
j) Grant Income
Grant
income is recognized at the fair value of the grant when it is received, and all substantive conditions have been satisfied. Grants
received from government and other agencies in advance of the specific research and development costs to which they relate are
deferred and recognized in the consolidated statement of operations in the period they are earned and when the related research
and development costs are incurred.
k) Income Taxes
The Company follows the provisions
of ASC 740, which requires the asset and liability method of accounting for income taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between
the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Anavex Life Sciences Corp.
Notes to the Consolidated Financial Statements
September 30, 2021 – Page 6
Note 2 Summary of
Significant Accounting Policies – (continued)
k) Income Taxes – (continued)
The Company follows the provisions
of ASC 740 regarding accounting for uncertainty in income taxes. The Company initially recognizes tax positions in the financial
statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions
are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized
upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. Application requires
numerous estimates based on available information. The Company considers many factors when evaluating and estimating its tax positions
and tax benefits, and its recognized tax positions and tax benefits may not accurately anticipate actual outcomes. As additional
information is obtained, there may be a need to periodically adjust the recognized tax positions and tax benefits. These periodic
adjustments may have a material impact on the consolidated statements of operations.
The Company recognizes interest
and penalties related to current income tax expense on the interest income, net line, in the accompanying consolidated statement
of operations. Accrued interest and penalties, if any, are included in accrued liabilities on the consolidated balance sheets.
l) Stock-based Compensation
The Company accounts for all stock-based
payments and awards under the fair value 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.
The Company has granted share purchase
option awards that vest upon achievement of certain performance criteria, or milestone-based awards. The Company estimates 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 it concludes that achieving the performance criteria is probable. The Company periodically reviews and updates
as appropriate its estimates of implicit service periods and conclusions on achieving the performance criteria. Performance awards
vest upon achievement of the performance criteria.
The Company uses 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. The Company uses 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. The Company’s 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. The Company does
not estimate forfeitures and elects to record actual forfeitures as they occur. The Company has not paid any dividends on its 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 the Company’s compensation committee in advance, “net settled”
in shares of the Company’s common stock. In a net settlement of an option or warrant, the Company does not receive payment of the