Cogstate : Business Update and March 2022 Quarter Cashflow

ASX Announcement

21 April 2022

3Q22	3Q21	3Q22 vs 3Q21
US$m	US$m	%
Total revenue from ordinary activities	9.3	8.8	5%
- Clinical Trials revenue	8.0	7.3	10%
- Healthcare revenue	1.1	1.5	(24%)
- Research revenue	0.1	0.06	100%
Sales contracts executed	19.2	13.3	44%
Contracted future revenue	143.5	79.7	80%
Net operating cash flow	3.0	(1.3)	n/a
Total cash flow	2.3	(1.2)	n/a
Net cash balance at end of period*	26.1	17.6	48%
Trade receivables	8.9	7.5	20%

Business Update and March 2022 Quarter Cashflow

All figures in US$

PCP = Previous Corresponding Period

Cogstate Ltd (ASX:CGS) has today released a business update and its Appendix 4C - Quarterly Cash Flow statement for the quarter ended 31 March 2022 (3Q22).

Highlights:

CLINICAL TRIALS SALES CONTRACTS OF $19.2M, UP 44% COMPARED TO PCP AND A RECORD 3Q RESULT.

3Q22 REVENUE OF $9.3M, UP 5% COMPARED TO PCP

• • Clinical Trials revenue of $8.0m, up 10% compared to PCP

• • Healthcare revenue of $1.1m, down 24% compared to PCP

TOTAL REVENUE BACKLOG OF $143.5 MILLION, A RECORD RESULT, UP 80% COMPARED TO PCP

• • Clinical Trials revenue backlog of $103.6 million, up 86% compared to PCP

• • Healthcare revenue backlog of $39.9 million

NET CASH OF $26.1M AT 31 MARCH 2022*

• • Cash inflow from operations of $2.3m, excluding cash flows relating to pass-through costs paid on behalf of customers ($3.0m including pass through cash flows).

• • Net cash increased $1.5m from $24.6m at 31 December 2021

GUIDANCE IN RESPECT OF FY22 REMAINS UNCHANGED

• • Group FY22 revenue in the range of $44-$47m with FY22 Operating expenses to remain in the range of 31%-33% of revenue, taking FY22 EBIT margins to a range of 20%-24%. Further details page 9.

* Calculated as gross cash less borrowings and less cash receipts received in advance for future pass-through charges.

Explanatory Notes

• 1. Sales contracts: In the Clinical Trials division, Cogstate enters into contracts ("sales contracts") with both pharmaceutical and biotechnology companies for the provision of Cogstate technology and services, for use in clinical research trials, to determine the extent to which their investigational compound is impacting the cognition of the patient population. The contract value will differ for each clinical trial, depending upon the scope of the technology and services provided by Cogstate, as well as the complexity and length of the trial. An increase in the total value of sales contracts executed will increase the revenue backlog and will, over time, result in an increase to revenue recognised by Cogstate.

• 2. Calculation of revenue from Clinical Trials division: Revenue from sales contracts is recognised over the life of the contract. The length of a clinical trial can vary from several months for a phase 1 study and up to 4-5 years for a phase 3 study. Revenue is recognised based upon achievement of pre-determined milestones. During each period, revenue may be recognised from (i) contracts in the backlog at the beginning of the period, as well as (ii) sales contracts executed during the period. Usually there is a time lag between an increase or decrease in the level of sales contracts executed and a corresponding change to recognised revenue.

• 3. Contracted future revenue backlog: Executed sales contract values that have not yet been recognised as revenue at period end are referred to as "contracted future revenue". The revenue from these contracts will be recognised upon achievement of pre-determined milestones throughout the clinical trials. The contracted future revenue figure provides insight into future revenue performance.

• 4. Healthcare revenue: Cogstate has developed tools specifically designed to aid healthcare professionals, in general and specialist practice medicine, with objective assessments of cognition in patients. Cogstate's Healthcare offering includes the system branded as Cognigram™, a medical device which allows for regular and standardised testing to assist in the early detection of cognitive decline that could be related to a range of factors, including neurodegenerative diseases such as Alzheimer's disease. On 26 October 2020, Cogstate announced an exclusive global licensing agreement with pharmaceutical company Eisai (was previously just Japan), under which Eisai will market Cogstate technology as digital cognitive assessment tools targeting physicians, corporations, municipalities and also directly to consumers.

  Under the 10-year global (ex-Japan) agreement between Eisai and Cogstate executed on 26 October 2020:

  • - In addition to the upfront payments from Eisai of US$15 million, Cogstate is also due to receive an ongoing royalty on revenue derived by Eisai from the sale of Cogstate technology. Over the course of the 10-year global agreement, the contractual terms prescribe that the royalty payments shall not be less than an additional $30 million ($10 million over years 1-5 and $20 million over years 6-10).

  • - The full $45m (upfront payment of $15m plus the minimum royalties of $30m due over the course of the global license agreement) is being amortised on a straight-line basis over 11 years (10-year term + 12 months to commence). Actual cash royalties paid in each period will be the higher of (i) royalty amount calculated based on sales of product or (ii) minimum annual cash royalty, which ramp up over the contract period.

Business Update - Commentary

Positive momentum in the Clinical Trials market continues, especially in Alzheimer's disease. The 3Q22 sales result ($19.2 million sales contracts executed) is the second highest result in the company's history (behind only the 1Q22 quarter), demonstrating the significant growth and sustained adoption of Cogstate technology and services, especially in Alzheimer's disease trials. Clinical Trials sales contracts over the first three quarters of FY22 total $73.6 million, up 105% on the equivalent period in the prior financial year, with 89% relating to Alzheimer's disease trials.

Cogstate's channel partnership sales strategy in Clinical Trials is beginning to show benefit. Meaningful progress has been made with one of our industry partners resulting in sizeable joint awards for both companies with two top 15 pharmaceutical companies. There is a growing pipeline of opportunities that we are progressing through channel partners.

The industry shift toward decentralised/hybrid trials continues and Cogstate is extremely well positioned to capitalise on this trend since our computerized tests are ideal for remote administration and we have significant and growing experience supporting centralised rating of non-Cogstate tests, which is a trend we expect to continue. Through the first three quarters, Cogstate has executed multiple sales contracts with a decentralised offering and we have multiple additional sales opportunities in play across rare disease and Alzheimer's disease.

Cogstate has joined the Decentralized Trials & Research Alliance (DTRA) whose 100 member organisations work to accelerate the adoption of patient-focused, decentralised clinical trials and make research participation accessible to everyone. Cogstate supports remote cognitive testing for thousands of patients and trial participants worldwide, and we look forward to learning from and contributing to DTRA's initiatives of creating definitions, refining best practices, providing education, and removing barriers to participation. Learn more about DTRA's mission and members >https://www.dtra.org/

The status of reimbursement in the USA of monoclonal antibodies targeting amyloid in Alzheimer's disease has been clarified following release of medicare coverage policy by the Centers for Medicare and Medicaid Services (CMS). The final policy, released on 7 April 2022, was very similar to the draft release previously, other than allowing that monoclonal antibody directed against amyloid that are approved by FDA for the treatment of Alzheimer's disease based upon evidence of efficacy from a direct measure of clinical benefit may be covered in CMS-approved prospective comparative studies. Study data for CMS-approved prospective comparative studies may be collected in a registry. We note that Cogstate's offering aligns well with collection of cognitive data via both virtual and in-person assessment as part of a registry.

Through Cogstate commercial partner, Eisai, Cogstate technology has been launched throughout Asia during 3Q22.

In February 2022 Japanese smartphone manufacturer, FCNT, hosted a new product showcase featuring the Raku-Raku F-52B, a model targeting older adults that comes with Cogstate technology pre-installed, which is branded as NouKNOW.

In January 2022, Eisai announced that Cogstate technology, branded as CogMate, will be marketed directly to consumers in Taiwan and Hong Kong, targeting municipalities and corporations. Launch has gone well with first sales already occurring.

Revenue

Cogstate reported quarterly revenue of $9.3 million for 3Q22, up 5% on pcp (3Q21 $8.8m). Revenue for the 9 months ended 31 March 2022 was $32.3 million, up 43% on pcp.

Revenue	3Q22	3Q21	Variance	FY22 YTD	FY21 YTD	Variance
US$ m	US$ m	%	US$ m	US$ m	%
Clinical Trials	8.0	7.3	10%	28.8	19.8	45%
Healthcare	1.1	1.5	(24%)	3.3	2.7	22%
Research	0.1	0.06	100%	0.1	0.2	(50%)
Total Revenue	9.3	8.8	5%	32.3	22.7	43%

Clinical Trials revenue in 3Q22 was $8.0m, up 10% on pcp, but down 18% compared to the most recent quarter (2Q22).

3Q22 Clinical Trials revenue was impacted by timing issues, specifically:

• 1) Delays with respect to study activity, specifically slower than expected patient enrolment in a key Alzheimer's study (noting that the enrolment delays are specific to the study and not indicative of broader industry issues). The slower than expected study recruitment has delayed the provision of Cogstate services, thereby impacting invoicing and recognition of revenue during 3Q22. This is expected to be a timing issue only and Cogstate expects that the deferred revenue will be recognised in the June quarter.

• 2) A large percentage of the $19.2 million of Clinical Trials sales contracts executed in the quarter occurred during the last two weeks of March. Therefore, only minimal revenue from those new contracts was recognised during 3Q22. In-quarter revenue yields vary depending on a number of dynamics including the timing of contracts signed, the types of new trials signed, and the speed of patient recruitment. Further detail on historical revenue yields has been provided as an appendix on page 10 of this document.

Notwithstanding the 3Q22 revenue result, revenue guidance for 2H22 and FY22 remains unchanged - with deferred revenue expected to be recognised in 4Q22.

In Healthcare, 3Q22 revenue was primarily the recognition of approximately $1.1m of deferred revenue associated with the Eisai licencing agreement. Healthcare revenue was down 24% on pcp, but identical to the most recent quarter (2Q22). The variation compared to pcp reflects a change to previous treatment of reimbursement of the cost of technology development, funded by Eisai. This was previously treated as revenue but changed to cost recovery in FY22.

Sales Contracts Executed

For the quarter ended 31 March 2022, Cogstate executed $19.2 million of Clinical Trials sales contracts, a record third quarter. Overall, 87% of the $19.2 million of contracts executed during the quarter was in respect of Alzheimer's disease trials. Clinical Trials sales contracts year to date (at 31 March 2022) now total $73.6 million, up 105% on the equivalent period in the prior financial year, with 89% relating to Alzheimer's disease trials.

Clinical Trials Sales Contracts Executed

For context, a history of Clinical Trials sales contracts executed, per quarter, since 1 July 2019 is provided below:

Sep Quarter

US$m

FY22 YTD FY21 FY20

$40.8 $8.3 $6.7

Dec Quarter US$m	1st Half US$m	Mar Quarter US$m	Jun Quarter US$m	2nd Half US$m	Financial Year US$m
$13.7	$54.5	$19.2
$14.3	$22.6	$13.3	$11.4	$24.7	$47.3
$17.5	$24.2	$9.4	$6.5	$15.9	$40.2