The following discussion should be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal year ended September 30, 2020, included elsewhere in this Annual Report on Form 10-K.

Financial Highlights

During fiscal 2020, we made significant progress in the advancement of clinical studies for ANAVEX®2-73, including continued enrollment of our Phase 2b/3 Alzheimer's disease trial and expansion of this trial internationally, 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 and expansion of the AVATAR Phase 2 study internationally and the commencement of the EXCELLENCE Phase 2/3 pediatric Rett syndrome study. While fiscal 2020 was marked by the outbreak of COVID-19, which temporarily slowed down activities in many of the countries in which these trials are taking place, our clinical trials were able to continue largely uninterrupted in compliance with local regulations and policies, and we were able to continue to recruit and screen new patients as much as possible to advance these studies. Additionally, we commenced the first in human Phase 1 clinical trial of ANAVEX®3-71 during fiscal 2020 with focus on the treatment of Frontotemporal Dementia (FTD) and other dementia indications with unmet medical need.

As a result, our operating expenses for fiscal 2020 increased to $31.1 million, from $29.1 million in fiscal 2019, an increase of approximately 6.9%. The increase is attributable to an increase in research and development expenses of $2.9 million in 2020 to $25.2 million, or approximately 13.3%.

During fiscal 2020, we utilized $21.3 million to fund our operations, compared to $18.5 million during fiscal 2019. Our cash position increased to $29.2 million at September 30, 2020. Our operations were financed through the issuance of shares of common stock under the 2019 Purchase Agreement, and the Sales Agreement.

We 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, and adding additional staffing to manage the clinical studies currently underway. We also continue to receive support from the Australian government for various clinical trials being conducted within Australia. We will continue to target potential research partners to further advance our pipeline compounds.

In August 2020, we announced a financial commitment by Shake It Up Australia Foundation (SIUAF) for Parkinson's Research to fund up to 50% of the costs of an Australian clinical study to develop ANAVEX®2-73 for the disease modifying treatment of Parkinson's disease. The financial commitment would be made through private placement purchases of our common stock at 200% of the fair market value on the purchase date and will be contingent upon the completion of certain clinical trial milestones relating to the proposed clinical trial. There was no impact on our consolidated financial statements for the year ended September 30, 2020 as a result of the commitment from SIUAF.

Net loss for fiscal 2020 was $26.3 million, or $0.45 per share, as compared to $26.3 million, or $0.54 per share in fiscal 2019.





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Results of Operations

Revenue

We are in the development stage and have not earned any revenues since our inception. 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.

Year ended September 30, 2020 compared to year ended September 30, 2019

Operating Expenses

Total operating expenses for the year ended September 30, 2020 were $31.1 million, compared to $29.1 million in fiscal 2019, which was an increase of approximately $2.0 million from fiscal 2019, or 6.9%.

Research and development expenses for fiscal 2020 were $25.2 million, as compared to $22.3 million fiscal 2019, an increase of $2.9 million, or approximately 13.3%. The largest reason for this increase is due to continued advancement, enrollment and expansion of the company's clinical trials with ANAVEX®2-73, the commencement of clinical trials for ANAVEX®3-71 and expanded clinical development staffing.

During fiscal 2020 our general and administrative expenses were $5.9 million as compared to $6.8 million in fiscal 2019, a decrease of $0.9 million, primarily related to decreased stock-option compensation charges of $1.0 million.

Other income

The net amount of other income for the year ended September 30, 2020 was $4.8 million as compared to $2.9 million for fiscal 2019. During fiscal 2020, we recorded $4.4 million in research and development incentive income, including the Australian research and development incentive credit administered through the Australian Tax Office, in connection with fiscal 2020 eligible expenditures and fiscal 2019 expenditures for which an overseas finding ruling was obtained during the current year. In comparison, research and development incentive income for fiscal 2019 was $2.5 million in connection with fiscal 2019 eligible expenditures.

Net loss for fiscal 2020 was $26.3 million, or $0.45 per share, compared to a net loss of approximately $26.3 million, or $0.54 per share for fiscal 2019.

Liquidity and Capital Resources

Working Capital



                          2020           2019
Current Assets      $  34,542,197 $   25,329,373
Current Liabilities     7,305,628      5,039,674
Working Capital     $  27,236,569 $   20,289,699

At September 30, 2020, we had $29.2 million in cash and cash equivalents, an increase of $7.0 million, from $22.2 million at September 30, 2019. The principal reason for this increase is due to net cash received from financing activities of $28.4 million from the issuance of common shares, offset by cash utilized in operations of $21.3 million.

We intend to continue to use our capital resources to advance our clinical trials for ANAVEX®2-73, and to perform work necessary to prepare for future development of our pipeline compounds.





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Cash Flows

                                                      2020             2019

Cash flows used in operating activities $ (21,287,046) $ (18,527,117) Cash flows provided by financing activities 28,350,434 17,782,109 Increase (decrease) in cash

$   7,063,388      $ (745,008)

Cash flow used in operating activities

There was an increase in cash used in operating activities of $2.8 million during fiscal 2020 due to an increase in clinical trial activities, as more fully described above.

Cash flow provided by financing activities

Cash provided by financing activities for fiscal 2020 was related to cash received from the issuance of shares under the 2019 Purchase Agreement and the Sales Agreement, as more fully described below. During fiscal 2020, we issued an aggregate of 9.4 million shares for gross proceeds of $28.8 million. During fiscal 2019, we issued an aggregate of 6.7 million shares for gross proceeds of $17.8 million.



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 $50,000,000 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 shall issue up to 162,191 shares pro rata, when and if Lincoln Park purchases, at our discretion, the $50,000,000 aggregate commitment. The purchase shares that may be sold pursuant to the 2019 Purchase Agreement may be sold by us to Lincoln Park at our discretion from time to time until July 1, 2022.

We may direct Lincoln Park, at our sole discretion, and subject to certain conditions, to purchase up to 200,000 shares of common stock on any business day (a "Regular Purchase"). The amount of a Regular Purchase may be increased under certain circumstances up to 250,000 shares provided that Lincoln Park's committed obligation for Regular Purchases on any business day shall not exceed $2,000,000. In the event we purchase the full amount allowed for a Regular Purchase on any given business day, we may also direct Lincoln Park to purchase additional amounts as accelerated and additional purchases. The purchase price of shares of common stock related to the future funding will be based on the then prevailing market prices of such shares at the time of sales as described in the 2019 Purchase Agreement.

At September 30, 2020, approximately $24.1 million in shares of our common stock remained available for purchase by Lincoln Park under the 2019 Purchase Agreement.





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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, for aggregate gross sale proceeds of up to $50,000,000 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. At September 30, 2020, an amount of $42.5 million remained available under the Sales Agreement.

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.



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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 study or trial contract.

In addition, we incur expenses in respect of patents and trademarks. The probability of success and length of time to develop commercial applications of the compounds subject to the underlying 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 compounds subject to the underlying patents and trademarks will ever be successfully commercialized. Due to these risks and uncertainties, we expense the patent and trademark costs within general and administrative expenses in our financial statements.

Stock-based Compensation

We account for all stock-based payments and awards under the fair value-based method.

We account for the granting of share purchase options and warrants to employees using the fair value method whereby all awards to employees will be recorded at fair value on the date of the grant. 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.

Share purchase options and warrants issued to non-employees are measured at the fair value of the equity instruments issued. Compensation expense for share purchase options and warrants issued to non-employees is recorded over the service performance period. Prior to our adoption of ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting on October 1, 2019, options and warrants subject to vesting were periodically re-measured until the counterparty performance was complete, and any change therein was recognized over the vesting period of the award and in the same manner as if we had paid cash instead of paying with or using equity based instruments. After the adoption of ASU No. 2018-07, we measure equity-classified share-based payment awards issued to nonemployees on the grant date, rather than remeasuring the awards through the performance completion date as previously required.

Compensation costs for stock-based payments with graded vesting are recognized on a straight-line basis.

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. Option pricing models require the input of highly subjective assumptions, including the expected price volatility. Changes in these assumptions can materially affect the fair value estimates.

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.

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