ANAVEX LIFE SCIENCES CORP. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 43 ANAVEX LIFE SCIENCES CORP. CONSOLIDATED FINANCIAL STATEMENTS September 30, 2021 44 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 45 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 46 ANAVEX LIFE SCIENCES CORP. CONSOLIDATED BALANCE SHEETS As at September 30, 2021 and 2020 2021 2020 Assets Current Cash and cash equivalents $ 152,107,745 $ 29,249,018 Incentive and tax receivables 9,136,831 4,849,340 Prepaid expenses and deposits 355,549 443,839 Deferred financing charges 16,365 — Total Assets $ 161,616,490 $ 34,542,197 Liabilities and Stockholders' Equity Current Liabilities Accounts payable $ 4,739,781 $ 3,989,054 Accrued liabilities - Note 3 5,614,774 3,316,574 Deferred grant income 443,831 — Total Liabilities 10,798,386 7,305,628 Commitments and Contingencies - Note 6 Capital stock Authorized: 10,000,000 preferred stock, par value $ 0.001 per share — — 200,000,000 common stock, par value $ 0.001 per share (2020: 100,000,000 common stock, par value $ 0.001 per share) Issued and outstanding: 75,918,465 common shares (2020 - 62,045,198 ) 75,920 62,047 Additional paid-in capital 348,328,048 186,851,752 Accumulated deficit ( 197,585,864 ) ( 159,677,230 ) Total Stockholders' Equity 150,818,104 27,236,569 Total Liabilities and Stockholders' Equity $ 161,616,490 $ 34,542,197 See Accompanying Notes to Consolidated Financial Statements 47 ANAVEX LIFE SCIENCES CORP. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS For the years ended September 30, 2021 and 2020 2021 2020 Operating expenses General and administrative $ 9,017,511 $ 5,856,609 Research and development 32,983,674 25,231,623 Total operating expenses ( 42,001,185 ) ( 31,088,232 ) Other income (expenses) Grant income 54,100 149,888 Research and development incentive income 4,547,099 4,375,025 Interest income, net 26,261 179,973 Foreign exchange gain (loss), net ( 267,344 ) 125,540 Total other income, net 4,360,116 4,830,426 Net loss before provision for income taxes ( 37,641,069 ) ( 26,257,806 ) Income tax expense, current ( 267,565 ) ( 22,664 ) Net loss and comprehensive loss $ ( 37,908,634 ) $ ( 26,280,470 ) Net Loss per share Basic and diluted $ ( 0.54 ) $ ( 0.45 ) Weighted average number of shares outstanding Basic and diluted 69,802,960 58,194,894 See Accompanying Notes to Consolidated Financial Statements 48 ANAVEX LIFE SCIENCES CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended September 30, 2021 and 2020 2021 2020 Cash Flows used in Operating Activities Net loss $ ( 37,908,634 ) $ ( 26,280,470 ) Adjustments to reconcile net loss to net cash used in operations: Stock-based compensation 8,231,403 4,876,906 Changes in non-cash working capital balances related to operations: Incentive and tax receivables ( 4,287,491 ) ( 2,206,595 ) Prepaid expenses and deposits 88,290 57,159 Accounts payable 750,727 465,722 Accrued liabilities 2,298,200 1,800,232 Deferred grant income 443,831 — Net cash used in operating activities ( 30,383,674 ) ( 21,287,046 ) Cash Flows provided by Financing Activities Issuance of common shares 153,218,762 28,754,198 Share issue costs ( 5,550,921 ) ( 403,764 ) Proceeds from exercise of warrants 1,466,500 — Proceeds from exercise of stock options 4,108,060 — Net cash provided by financing activities 153,242,401 28,350,434 Increase in cash and cash equivalents during the period 122,858,727 7,063,388 Cash and cash equivalents, beginning of period 29,249,018 22,185,630 Cash and cash equivalents, end of period $ 152,107,745 $ 29,249,018 Supplemental Cash Flow Information Cash paid for state and local minimum income taxes $ 139,531 $ 22,664 See Accompanying Notes to Consolidated Financial Statements 49 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 Balance, September 30, 2019 52,650,521 $ 52,652 $ 153,633,807 $ ( 133,396,760 ) $ 20,289,699 Shares issued under 2019 purchase agreement Purchase shares 7,564,584 7,565 21,246,733 — 21,254,298 Commitment shares 68,943 69 ( 69 ) — — Shares issued pursuant to cashless exercise of stock options 721 1 ( 1 ) — — Shares issued under Sales Agreement, net of share issuance costs 1,760,429 1,760 7,094,376 — 7,096,136 Share based compensation — — 4,876,906 — 4,876,906 Net loss — — — ( 26,280,470 ) ( 26,280,470 ) Balance, September 30, 2020 62,045,198 $ 62,047 $ 186,851,752 $ ( 159,677,230 ) $ 27,236,569 Shares issued under 2019 purchase agreement Purchase shares 4,007,996 4,008 24,107,190 — 24,111,198 Commitment shares 78,213 78 ( 78 ) — — Shares issued pursuant to exercise of stock options 1,421,529 1,421 4,106,639 — 4,108,060 Shares issued under Sales Agreement, net of share issuance costs 5,634,576 5,635 76,664,392 — 76,670,027 Shares issued pursuant to registered direct offering, net of share issue costs 2,380,953 2,381 46,900,600 — 46,902,981 Shares issued pursuant to exercise of warrants 350,000 350 1,466,150 — 1,466,500 Share based compensation — — 8,231,403 — 8,231,403 Net loss — — — ( 37,908,634 ) ( 37,908,634 ) Balance, September 30, 2021 75,918,465 75,920 348,328,048 ( 197,585,864 ) $ 150,818,104 See Accompanying Notes to Consolidated Financial Statements 50 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. 51 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. 52 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. 53 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. 54 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. 55 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 exercise price from the holder but reduces 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 exercised. Shares issued pursuant to the exercise of options and warrants are issued from the Company’s treasury. 56 Anavex Life Sciences Corp. Notes to the Consolidated Financial Statements September 30, 2021 – Page 7 Note 2 Summary of Significant Accounting Policies – (continued) m) Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Assets and liabilities that are measured at fair value are reported using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows: Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date; Level 2 - observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and Level 3 - assets and liabilities whose significant value drivers are unobservable by little or no market activity and that are significant to the fair value of the assets or liabilities. At September 30, 2021 and 2020, the Company did not have any Level 3 assets or liabilities. n) Recent Accounting Pronouncements In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes (ASC 740)", which is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying and amending existing guidance to improve consistent application. ASU 2019-12 will be effective for the Company on October 1, 2021. The Company does not expect such guidance to have a material impact on the Company’s operations, financial condition, or cash flows. Note 3 Accrued Liabilities The principal components of accrued liabilities consists of: Schedule of components of accrued liabilities 2021 2020 Clinical site costs and patient visits $ 2,035,800 $ 760,900 Accrued compensation and benefits 1,201,903 567,805 Fixed contract accruals 649,649 367,429 All other accrued liabilities 1,727,422 1,620,440 Total accrued liabilities $ 5,614,774 $ 3,316,574 57 Anavex Life Sciences Corp. Notes to the Consolidated Financial Statements September 30, 2021 – Page 8 Note 4 Other Income Grant income During the year ended September 30, 2021, the Company received $ 497,931 of a $995,862 research grant awarded by the Michael J. Fox Foundation for Parkinson’s Research. The grant will be used to fund a clinical trial of the Company’s lead compound, ANAVEX ® 2-73 related to Parkinson’s disease. The grant income is being deferred when received and amortized to other income as the related research and development expenditures are incurred. During the year ended September 30, 2021, the Company recognized $ 54,100 of this grant on its statements of operations within grant income. At September 30, 2021 an amount of $ 443,831 (2020: $ 0 Nil) of this grant is recorded as deferred grant income, representing the amount of this grant which has not yet been amortized to other income. During the year ended September 30, 2017, the Company was awarded grant funding in the amount of $ 597,886 . The grant was received in equal quarterly installments over a period of two years ending during the year ended September 30, 2020, in exchange for a commitment to complete clinical testing for a therapeutic drug candidate for the treatment of Rett syndrome. The grant income was deferred when received and amortized to other income as the related research and development expenditures were incurred. During the year ended September 30, 2021, the Company recognized $ Nil (2020: $ 149,888 ) of this grant on its statement of operations as a component of other income. At September 30, 2020, the Company had recognized the full amount of grant funding. Research and development incentive income Research and development incentive income represents income earned by the Company’s Australian subsidiary, of the Australian research and development incentive credit, (the “ATO R&D Credit”). During the year ended September 30, 2021, the Company recorded research and development incentive income of $ 4,547,099 (AUD 6,068,993 ) (2020: $ 4,375,025 (AUD 6,392,266 )) in respect of the ATO R&D Credit for eligible research and development expenses incurred during the year. As a matter of course, the Company may be subject to pre-issue review or audit by the ATO. The Company was notified that the ATO is performing a pre-issue review of the 2020 research and development incentive income return. The Company is responding to questions and requests for information and does not expect an adverse finding. 58 Anavex Life Sciences Corp. Notes to the Consolidated Financial Statements September 30, 2021 – Page 9 Note 5 Equity Offerings Common Stock Common shares are voting and are entitled to dividends as declared at the discretion of the Board of Directors. Preferred Stock The Company’s Board of Directors (the “Board”) has the authority to issue preferred stock in one or more series and to fix the rights, preferences, privileges, restrictions and the number of shares constituting any series or the designation of the series. Registered Direct Offering On June 22, 2021, the Company and Deep Track Capital entered into a securities purchase agreement pursuant to which the Company sold to Deep Track Capital an aggregate of 2,380,953 shares of common stock at $ 21 per share in a registered direct offering, for gross proceeds of $ 50,000,013 . Net proceeds of the offering were $ 46,902,981 after deducting offering fees and expenses. Sales Agreement The Company entered into a Controlled Equity Offering Sales Agreement on July 6, 2018, which was amended and restated on May 1, 2020 (the “Sales Agreement”) with Cantor Fitzgerald & Co. and SVB Leerink LLC (together the “Sales Agents”), pursuant to which the Company may offer and sell shares of common stock registered under an effective registration statement from time to time through the Sales Agents (the “Offering”). Upon delivery of a placement notice based on the Company’s instructions and subject to the terms and conditions of the Sales Agreement, the Sales Agents may sell the Shares by methods deemed to be an “at the market offering” 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 the prior written consent of the Company. The Company is not obligated to make any sales of Shares under the Sales Agreement. The Company or Sales Agents may suspend or terminate the offering of Shares upon notice to the other party, subject to certain conditions. The Sales Agents will act as agent 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. The Company has agreed to pay the Sales Agents commissions for their services of up to 3.0 % of the gross proceeds from the sale of the Shares pursuant to the Sales Agreement. The Company also agreed to provide the Sales Agents with customary indemnification and contribution rights. During the year ended September 30, 2021, 5,634,576 shares were sold pursuant to the Offering for gross proceeds of $ 79,107,550 (net proceeds of $ 76,670,027 after deducting offering expenses) (2020: 1,760,429 shares were sold for gross proceeds of $ 7,499,900 (net proceeds of $ 7,096,136 )). At September 30, 2021, an amount of $ 163,392,550 was registered pursuant to an effective registration statement and available to be sold under the Sales Agreement. 59 Anavex Life Sciences Corp. Notes to the Consolidated Financial Statements September 30, 2021 – Page 10 Note 5 Equity Offering Agreements – (continued) 2019 Purchase Agreement On June 7, 2019, the Company entered into a $ 50,000,000 purchase agreement (the “2019 Purchase Agreement”) with Lincoln Park, as amended on July 1, 2020, pursuant to which the Company had the right to sell and issue to Lincoln Park, and Lincoln Park was obligated to purchase, up to $ 50,000,000 in value of its shares of common stock from time to time over a three-year period until July 1, 2022. In consideration for entering into the 2019 Purchase Agreement, the Company issued to Lincoln Park 324,383 shares of common stock as a commitment fee during the year ended September 30, 2019 and agreed to issue up to 162,191 shares pro rata, when and if, Lincoln Park purchased, at the Company’s discretion, the $50,000,000 aggregate commitment. During the year ended September 30, 2021, the Company issued to Lincoln Park an aggregate of 4,086,209 (2020 – 7,633,527 ) shares of common stock under the 2019 Purchase Agreement, including 4,007,996 (2020: 7,564,584 ) shares of common stock for an aggregate purchase price of $ 24,111,198 (2020: $ 21,254,298 ) and 78,213 (2020: 68,943 ) commitment shares. At September 30, 2021, no shares remained available for issuance under the 2019 Purchase Agreement (September 30, 2020: $ 24,111,198 in value of shares). Note 6 Commitments and Contingencies a) Lease During the year ended September 30, 2021 the Company incurred office lease expense of $ 130,784 (2020: $ 233,423 ). b) Employee 401(k) Benefit Plan The Company has a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code. The plan covers all United States based employees. United States based employees eligible to participate in the plan may contribute up to the current statutory limits under the Internal Revenue Service regulations. The 401(k) plan permits the Company to make additional matching contributions on behalf of contributing employees. During the year ended September 30, 2021, the Company made $ 128,856 (2020: $ 98,058 ) in matching contributions under the 401(k) plan. c) Litigation The Company is subject to claims and legal proceedings that arise in the ordinary course of business. Such matters are inherently uncertain, and there can be no guarantee that the outcome of any such matter will be decided favorably to the Company or that the resolution of any such matter will not have a material adverse effect upon the Company’s consolidated financial statements. The Company does not believe that any of such pending claims and legal proceedings will have a material adverse effect on its consolidated financial statements. 60 Anavex Life Sciences Corp. Notes to the Consolidated Financial Statements September 30, 2021 – Page 11 Note 6 Commitments and Contingencies – (continued) d) Share Purchase Warrants The following table summarizes the warrant activity during the years ended September 30, 2021 and 2020: Schedule of exercisable share purchase warrants outstanding Weighted Average Exercise Price Number of Shares ($) Balance, September 30, 2019 350,000 4.19 Granted 150,000 3.17 Balance, September 30, 2020 500,000 3.88 Granted 60,000 12.00 Exercised ( 350,000 ) 4.19 Balance, September 30, 2021 210,000 5.69 At September 30, 2021 the Company had share purchase warrants outstanding as follows: Schedule of share purchase warrants outstanding Number Exercise Price Expiry Date 150,000 $ 3.17 May 6, 2024 60,000 $ 12.00 April 21, 2026 210,000 e) Stock–based Compensation Plan –(continued) 2015 Stock Option Plan On September 18, 2015, the Company’s board of directors approved a 2015 Omnibus Incentive Plan (the “2015 Plan”), which provided for the grant of stock options and restricted stock awards to directors, officers, employees and consultants of the Company. The maximum number of our common shares reserved for issue under the plan was 6,050,553 shares, subject to adjustment in the event of a change of the Company’s capitalization. At September 30, 2021, 146,371 (2020: 133,036 ) options remain available for issue under the 2015 Plan. 2019 Stock Option Plan On January 15, 2019, the Board approved the 2019 Omnibus Incentive Plan (the “2019 Plan”), which provides for the grant of stock options and restricted stock awards to directors, officers, employees, consultants and advisors of the Company. Under the terms of the 2019 Plan, 6,000,000 additional shares of Common Stock are available for issuance under the 2019 Plan, in addition to the shares available under the 2015 Plan. Any awards outstanding under the 2015 Plan or the Company’s 2007 Stock Option Plan (the “2007 Plan”) will remain subject to and be paid under the 2015 Plan or the 2007 Plan, respectively, and any shares subject to outstanding awards under the 2015 Plan or the 2007 Plan that subsequently cease to be subject to such awards (other than by reason of settlement of the awards in shares) will automatically become available for issuance under the 2019 Plan. 61 Anavex Life Sciences Corp. Notes to the Consolidated Financial Statements September 30, 2021 – Page 12 Note 6 Commitments and Contingencies – (continued) e) Stock–based Compensation Plan – (continued) The 2019 Plan provides that it may be administered by the Board, or the Board may delegate such responsibility to a committee. The exercise price will be determined by the board of directors at the time of grant shall be at least equal to the fair market value on such date. If the grantee is a 10% stockholder on the grant date, then the exercise price shall not be less than 110% of fair market value of the Company’s shares of common stock on the grant date. Stock options may be granted under the 2019 Plan for an exercise period of up to ten years from the date of grant of the option or such lesser periods as may be determined by the board, subject to earlier termination in accordance with the terms of the 2019 Plan. At September 30, 2021, 456,332 (2020: 3,161,665 ) options remain available for issue under the 2019 Plan. A summary of the status of Company’s outstanding stock purchase option activity during the years ended September 30, 2021 and 2020 is presented below: Schedule of outstanding stock purchase options Weighted Weighted Average Grant Aggregate Average Exercise Date Fair intrinsic value Number of Shares Price ($) Value ($) ($) Outstanding, September 30, 2019 8,462,933 3.58 4,115,032 Granted 1,695,000 2.96 2.27 Forfeited ( 68,332 ) 3.01 2.44 Exercised ( 13,335 ) 3.15 2.61 2,400 Outstanding, September 30, 2020 10,076,266 3.48 14,982,581 Granted 2,732,000 12.55 9.32 Forfeited ( 55,834 ) 3.04 2.43 Exercised ( 1,421,529 ) 2.89 2.43 24,446,305 Outstanding, September 30, 2021 11,330,903 5.74 140,132,451 Exercisable, September 30, 2021 7,228,488 3.73 102,786,851 The following summarizes information about stock options at September 30, 2021 by a range of exercise prices: Summarizes information about stock options Number of Weighted average remaining Weighted average Number of Weighted average Range of exercise prices outstanding contractual life exercise vested exercise From To options (in years) price options price $ 0.92 $ 2.96 4,309,349 6.25 2.31 3,167,682 2.10 $ 3.15 $ 4.80 2,117,500 6.33 3.30 1,830,836 3.29 $ 5.04 $ 8.98 3,397,054 6.45 6.05 2,207,054 6.35 $ 12.00 $ 13.01 230,000 9.52 12.44 22,916 12.42 $ 18.11 $ 24.58 1,277,000 9.82 19.33 — — 11,330,903 7,228,488 The weighted average grant date fair value of options vested during the year ended September 30, 2021 was $ 2.54 (2020: $ 2.55 ). At September 30, 2021, the weighted average contractual life of options outstanding was 6.79 years (2020: 6.96 years) and for options exercisable was 5.51 years (2020: 6.25 years). The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted market price of the Company’s stock for the options that were in-the-money at September 30, 2021. The Company recognized stock-based compensation expense of $ 8,231,403 during the year ended September 30, 2021 (2020: $ 4,876,906 ) in connection with the issuance and vesting of stock options and warrants in exchange for services. These amounts have been included in general and administrative expenses and research and development expenses on the Company’s consolidated statements of operations as follows: Schedule of general and administrative expenses and research and development expenses 2021 2020 General and administrative $ 3,571,335 $ 2,210,789 Research and development $ 4,660,068 $ 2,666,117 Total stock-based compensation $ 8,231,403 $ 4,876,906 62 Anavex Life Sciences Corp. Notes to the Consolidated Financial Statements September 30, 2021 – Page 13 Note 6 Commitments – (continued) e) Stock–based Compensation Plan – (continued) An amount of approximately $ 21,650,000 in stock-based compensation is expected to be recorded over the remaining term of such options and warrants through fiscal 2024. The fair value of each option and warrant award is estimated on the date of grant using the Black Scholes option pricing model based on the following weighted average assumptions: Schedule of weighted average assumptions for fair value of each option award 2021 2020 Risk-free interest rate 0.73 % 1.57 % Expected life of options (years) 5.74 5.53 Annualized volatility 93.43 % 95.99 % Dividend rate 0.00 % 0.00 % The fair value of stock compensation charges recognized during the years ended September 30, 2021 and 2020 was determined with reference to the quoted market price of the Company’s shares on the grant date. Note 7 Income Taxes The Company’s U.S. and foreign loss before income taxes are set forth below: Schedule of Income before Income Tax, Domestic and Foreign 2021 2020 United States $ ( 28,850,926 ) $ ( 18,096,148 ) Foreign ( 8,790,143 ) ( 8,161,658 ) Total $ ( 37,641,069 ) $ ( 26,257,806 ) The components of net deferred income tax assets as of September 30, 2021 and 2020 are as follows: Schedule of deferred tax asset and liabilities 2021 2020 Net operating loss carryforwards $ 34,982,000 $ 23,397,000 Research and development tax credit carryforwards 1,577,000 2,069,000 Stock-based compensation 10,453,000 8,283,000 Unpaid charges 89,000 83,000 Intangible asset costs 323,000 132,000 Foreign exchange and other 62,000 27,000 Valuation allowance deferred tax assets ( 47,486,000 ) ( 33,991,000 ) Net deferred tax assets $ — $ — 63 Anavex Life Sciences Corp. Notes to the Consolidated Financial Statements September 30, 2021 – Page 14 Note 7 Income Taxes – (Continued) A reconciliation of income tax expense at the statutory federal income tax rate and income taxes as reflected in the consolidated financial statements for the years ended September 30, 2021 and 2020 is as follows: 2021 2020 Income tax benefit at statutory federal rate $ ( 7,934,000 ) $ ( 5,519,000 ) Foreign income taxed at other rates ( 353,000 ) ( 723,000 ) Permanent differences relating to stock based compensation ( 4,379,000 ) — Permanent differences relating to Section 162(m) 816,000 — Other permanent differences 741,000 35,000 Adjustment to tax assets based on Section 382 3,330,000 — Research and development credits, net 1,042,000 1,267,000 State and local taxes ( 7,022,000 ) ( 2,911,000 ) Adjustment and true up to prior years' tax provision 48,000 373,000 Effect of change in statutory rates 216,000 36,000 State minimum and exise taxes 267,565 22,664 Change in valuation allowances 13,495,000 7,442,000 Income tax expense $ 267,565 $ 22,664 As of September 30, 2021, the Company had U.S. federal net operating loss carryforwards of approximately $ 101.6 million (2020: $ 77.0 million) of which $37.7 will begin to expire in 2025 and $63.9 can be carried forward indefinitely , state and local net operating loss carryforwards of approximately $ 177.7 million (2020: $ 103.1 million) which will begin to expire in 2036 , and Research and Development tax credits of $ 1.6 million (2020: $ 2.1 million) which will begin to expire in 2029. The Company had approximately $ 7.9 million (approximately AU$ 11.2 million) (2020: $ 4.3 million) of net operating loss carryforwards in Australia, which have an indefinite life, available to offset future taxable income in those jurisdictions. The Company evaluates its valuation allowance requirements based on available evidence. When circumstances change, and this causes a change in management’s judgment about the recoverability of deferred tax assets, the impact of the change on the valuation allowance is reflected in current income. Because management of the Company does not currently believe that it is more likely than not that the Company will receive the benefit of these assets, a valuation allowance has been established at September 30, 2021 and 2020. Uncertain Tax Positions The Company files income tax returns in the U.S. federal jurisdiction and various state and local and foreign jurisdictions. The Company’s tax returns are subject to tax examinations by U.S. federal and state tax authorities, or examinations by foreign tax authorities until the respective statutes of limitation expire. The Company is subject to tax examinations by tax authorities for all taxation years commencing on or after 2014. Under the provisions of the Internal Revenue Code, the net operating loss (“NOL”) carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Under Section 382 of the Internal Revenue Code, NOL and tax credit carryforwards may become subject to an annual limitation in the event of an over 50% cumulative change in the ownership interest of significant stockholders over a three-year, as well as similar state tax provisions. The Company conducted a Section 382 study during the year ended September 30, 2021 and determined that, during the year ended September 30, 2015, there was a change in ownership which resulted in $25.8 million of federal NOLs being subject to an annual limitation. During the year ended September 30, 2021, the Company reduced its federal NOLs by $12.1 million and its Research and development tax credit carryforwards by $0.8 million, which are the amount of tax assets that will expire unutilized pursuant to the Section 382 study. This resulted in a reduction of $2.5 million of NOLs and $0.8 million of research and development credits and a corresponding reduction in the valuation allowance of $ 3.3 million, which was recorded in the current fiscal year. Subsequent ownership changes in future years could trigger additional limitations of the Company’s NOLs. As of September 30, 2021, the Company did not provide any foreign withholding taxes related to its foreign subsidiaries’ undistributed earnings, as such earnings have been retained and are intended to be indefinitely reinvested to fund ongoing operations of the foreign subsidiaries. It is not practicable to estimate the amount of taxes that would be payable upon remittance of these earnings, because such tax, if any, is dependent upon circumstances existing if and when remittance occur. 64 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL MATTERS Not Applicable