Item
2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
You
should read the following discussion and analysis of our financial condition and results of operations in conjunction with our
consolidated financial statements and the related notes to the consolidated financial statements included elsewhere in this Form
10-Q. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements
regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,”
“intend,” “believe,” or similar language. All forward-looking statements included in this document are
based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements.
Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially
from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information
set forth under the heading “Risk Factors” in the reports we file with the Securities and Exchange Commission. Readers
are cautioned not to place undue reliance on these forward-looking statements.
Business
Overview
We
are a life science company focused on the development and commercialization of a pharmaceutical preparation to treat obesity and
the symptoms of type 2 diabetes. For our first product opportunity we have engaged Charles River Laboratories for the discovery
of a small molecule drug that activates metabolic pathways to increase energy expenditure. In completed animal trials our proprietary
approach to the pharmaceutical activation of this LKB-1 AMPK (
Adenosine Monophosphate dependent
Protein Kinase)
pathway resulted in increased energy expenditure, decreased fat mass and resulting weight loss, lower blood
glucose, improved insulin sensitivity, lower cholesterol, and lower blood triglyceride levels.
Unlike
most other FDA approved weight loss drugs, our strategy does not depend on a pharmaco-neurological manipulation of the higher-brain
centers for appetite and/or satiety. Rather, our proprietary drug approach targets the master energy regulatory pathway that has
been proven to exist not only in higher mammals, but also in all living cells that possess a nucleus. Because an intensive aerobic
and resistance strength-training regime is the natural way to activate these pathway effects, we believe that our drug will help
obese patients mimic the effect of a more healthy lifestyle and lose weight.
We
believe that a drug that will step up the body’s metabolism of fat will address the biggest health problem in the world,
obesity. Obesity is also implicated as a causative and an additive to a host of other conditions, the most important of which
are Type 2 diabetes, cardiovascular disease and cancer. Type II diabetes, which now consumes roughly one sixth of every health
care dollar in America, is a direct result of obesity.
Financial
Operations Overview
Upon
commercialization of the Company’s obesity therapeutic, we will begin working with third-party payors to establish reimbursement
coverage policies. Where policies are not in place, we will pursue case-by-case reimbursement. We believe that as much as
20% of our future revenues may be derived from product(s) billed to Medicare. We will begin working with many payors, including
Medicare, to establish policy-level reimbursement, which, if in place, will allow us to recognize revenues upon submitting an
invoice. We do not expect to recognize the majority of revenues in this manner until calendar 2022, at the earliest.
Since our inception, we have generated significant
net losses. As of August 31, 2016, we had an accumulated deficit of $3,047,345. We incurred net losses of $179,340 and $768,722
in the three months ended August 31, 2016 and 2015, respectively and $438,998 and $914,173 for the six months ended August
31, 2016 and 2015, respectively. We expect our net losses to continue for at least the next several years. We anticipate
that a substantial portion of our capital resources and efforts will be focused on research and development, both to develop our
initial obesity therapeutic and to develop additional products for obesity and type 2 diabetes, scale up our commercial organization,
and other general corporate purposes. Our financial results will be limited by a number of factors, including establishment
of coverage policies by third-party insurers and government payors, our ability in the short term to collect from payors often
requiring a case-by-case manual appeals process, and our ability to recognize revenues other than from cash collections on therapeutics
billed until such time as reimbursement policies or contracts are in effect. Until we receive routine reimbursement and are
able to record revenues as therapeutics are prescribed and delivered, we are likely to continue reporting net losses.
Critical
Accounting Policies and Significant Judgments and Estimates
This
discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements,
which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these
financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities
and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues
and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our
estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results could therefore differ materially from those estimates under different assumptions or
conditions.
We
believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation
of our financial statements.
Revenue
Recognition
We
have generated no revenues since our inception. Product revenues for our first product, our therapeutic for the treatment
of obesity, are expected to be generated from the projected commercial launch in 2022, and are expected to be recognized on a
cash basis because we will have limited collection experience and a limited number of contracts. In accordance with
our policy, revenues for tests therapeutic prescribed will be recognized on an accrual basis when the related costs are incurred,
provided there is a contract or coverage policy in place and the following criteria are met:
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persuasive
evidence that an arrangement exists;
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delivery
has occurred or services rendered;
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the
fee is fixed and determinable; and
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collectability
is reasonably assured.
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Determination
of the last two criteria will be based on management’s judgment regarding the nature of the fee charged for products or
services delivered and the collectability of those fees.
We
expect to generally bill third-party payors for our obesity therapeutic upon the filling of a patient prescription. Accordingly,
we take assignment of benefits and the risk of collection with the third-party payor. We usually bill the patient directly for
amounts owed after multiple requests for payment have been denied or only partially paid by the insurance carrier. As a new drug,
our obesity therapeutic may be considered investigational by payors and not covered under their reimbursement policies. Consequently,
we expect to pursue case-by-case reimbursement where policies are not in place or payment history has not been established.
Contract
revenues are expected to be derived from studies conducted with biopharmaceutical and pharmaceutical companies and will be recognized
on a contract specific basis. Under certain contracts, our input, measured in terms of full-time equivalent level of effort
or running a set of assays through our laboratory under a contractual protocol, will trigger payment obligations and revenues
will be recognized as costs are incurred or assays are processed. Certain contracts May have payment obligations that are triggered
as milestones are complete, such as completion of a successful set of experiments. In these cases, revenues are recognized when
the milestones are achieved.
Clinical Collaborator Costs
We expect to enter into collaboration
and clinical trial agreements with clinical collaborators and record these costs as research and development expenses. We
plan to record accruals for estimated study costs comprised of work performed by our collaborators under contract terms. All clinical
collaborators will be expected to enter into agreements with us, which specify work content and payment terms.
Results of Operations
Comparison of the Three and Six Months
Ended August 31, 2016 and August 31, 2015
Revenues
. There were
no revenues for the three and six months ended August 31, 2016 and August 31, 2015, respectively, because we have not yet commercialized
our obesity therapeutic.
Cost of Product Revenues
. No
cost of product revenues were recorded in the three months and six months ended August 31, 2016 and August 31, 2015, respectively, because
we have not yet commercialized our obesity therapeutic.
General and Administrative Expenses
. General
and administrative expenses totaled $161,403 for the three months ended August 31, 2016 as compared to $761,222 for the three months
ended August 31, 2015. General and administrative expenses totaled $409,417 for the six months ended August 31, 2016 as compared
to $803,273 for the six months ended August 31, 2015. This represents a decrease of $599,819 for the three months and $393,856
for the six months ended August 31, 2016. This decrease was due in part to stock based compensation of $625,000 in the 2015
period versus no stock based compensation costs and normal costs for legal, accounting and other professional costs in the 2016
period.
Research and Development Expenses.
Research and development expenses were $8,904 for the three months ended August 31, 2016 as compared to $7,500 for
the three months ended August 31, 2015. Research and development expenses were $16,404 for the six months ended August 31, 2016
as compared to $110,900 for the six months ended August 31, 2015. This represents an increase of $1,404 for the three months ended
August 31, 2016 over the three months ended August 31, 2015 versus a decrease of 94,496 over the six month period. This
three month increase was primarily as a result of payment of license associated fees to Albert Einstein College of Medicine,
Inc. The six month decrease was a result of decreased R&D activity during the period.
Interest Expense, Net.
We
recorded $7 of interest income during the three months ended August 31, 2016 and $0 during the three months ended August 31, 2015,
respectively. We recorded $9,040 of interest expense during the three months ended August 31, 2016 and $0 during the six months
ended August 31, 2015, respectively. We recorded $13,191 of interest expense during the six months ended
August 31, 2016 and $0 during the six months ended August 31, 2015, respectively.
Net Loss.
As a result
of the factors described above, we had a net loss of $179,340 for the three months ended August 31, 2016 as compared to $768,722
for the three months ended August 31, 2015. As a result of the factors described above, we had a net loss of $438,998 for the six
months ended August 31, 2016 as compared to $914,173 for the six months ended August 31, 2015.
Liquidity
and Capital Resources
Since
our inception, we have incurred significant losses and, as of August 31, 2016, we had an accumulated deficit of $3,047,345. We
have not yet achieved profitability and anticipate that we will continue to incur net losses for the foreseeable future. We
expect that our research and development, general and administrative and selling and marketing expenses will continue to grow
and, as a result, we will need to generate significant product revenues to achieve profitability. We may never achieve profitability.
Sources
of Liquidity
Since
our inception, our operations have been financed through the sale of our common stock and issuance of debt. Through August 31,
2016, we had received net proceeds of approximately $310,801 through the sale of our common stock to investors. In
December of 2015 and January of 2016 we entered into a Convertible Note Agreement with two investors for a total of $60,000. On
April 20, 2016 we entered into an unsecured promissory note with Corelli Capital A.G. for the sum of $292,500.00. We entered into
an Equity Line of Credit Agreement with Corelli Capital A.G. on July 12, 2016. As of August 31, 2016, we had cash and cash equivalents,
of $62,441.
Cash
Flows
As of August 31, 2016, we had $62,441 in cash
and cash equivalents, compared to $0 on August 31, 2015.
Net cash used in operating activities was $331,734
for the six months ended August 31, 2016, compared to $22,052 for the six months ended August 31, 2015. The increase in cash used
was primarily due to increased operating expenses.
Net cash used in investing activities was $8,250
for the six months ended August 31, 2016, compared to $0 for the six months ended August 31, 2015. We expect amounts used in investing
activities to increase in fiscal year 2017 and beyond as we expand research and development activities and establish our proposed
commercial laboratory.
Net cash provided by financing activities during
the six months ended August 31, 2016 was $392,500, compared to $0 for the six months ended August 31, 2015. This is mainly
due to proceeds received from notes payable and the equity line of credit with Corelli Capital A.G.
Contractual
Obligations
As
of August 31, 2016, we had the following contractual commitments:
We
are required to make a series of annual minimum royalty payments under the License Agreement with Albert Einstein College of Medicine
beginning on the first anniversary date, or March 3, 2015. The initial payment of $30,000, due March 3, 2015 was not made
and the second annual payment, due March 3, 2016 was not made. As of the date of this filing the Company has not received any
demand for payment or notice of default from Albert Einstein College of Medicine. The Company plans to pay these minimum royalty
payments as soon as adequate funds are available.
For
a period of seven years on each anniversary of the first payment, we are required to make additional payments in amounts that
gradually increase beginning in year five. We are required to make additional payments of $30,000 in each of 2017 and 2018
and $50,000 in 2019, $75,000 in 2020, and $100,000 in 2021 and every year the License is in effect thereafter.
Beginning
in the second half of calendar 2017, we intend to enter into arrangements for the acquisition of laboratory equipment, computer
hardware and software, leasehold improvements and office equipment. We cannot at this time provide assurances that we will
be able to enter into agreements with vendors on terms commercially favorable to us or that we will be able to enter into such
arrangements without securing additional financing.
We
currently lease approximately 3,000 square feet of administrative and office space on a month-to-month basis for an annual cost
of $25.00 per square foot.
Operating
Capital and Capital Expenditure Requirements
We
expect to continue to incur substantial operating losses in the future and to make capital expenditures to keep pace with the
expansion of our research and development programs, which we expect to fund in part with the proceeds of private placements of
our securities. It may take several years to move any one of a number of product candidates in clinical research through
the development phase and validation phase to commercialization. We expect that the proceeds from the sale of our securities
and our existing cash and cash equivalents will be used to fund working capital and for capital expenditures and other general
corporate purposes, such as licensing technology rights, partnering arrangements, or reduction of debt obligations. However, there
can be no assurance that we will be able obtain financing, if at all or upon terms that will be acceptable to us.
As
a result of the recent economic recession, and the continuing economic uncertainty, it has been difficult for companies to obtain
equity or debt financing. While the credit markets have improved over the last year, it remains difficult for smaller companies
to obtain financing on reasonable terms.
The
amount and timing of our actual expenditures vary significantly depending upon a number of factors, such as the progress of our
product development, regulatory requirements, commercialization efforts, the amount of cash used by operations and progress in
reimbursement. We expect that we will receive limited payments for our weight loss drug billings from the beginning of our
marketing efforts into the foreseeable future. As reimbursement contracts with third-party payors are put into place, we
expect an increase in the number and level of payments received for our weight loss drug billings.
We
currently anticipate that our cash on hand as well as drawdowns from our Equity Line of Credit Agreement (see “Sources of
Liquidity”) will be sufficient to fund our operations for at least the next 12 months. We cannot be certain that
any of our future efforts to secure reimbursement contract programs or development of future products will be successful or that
we will be able to raise sufficient additional funds to see these programs through to a successful result.
Our
future funding requirements will depend on many factors, including the following:
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the
rate of progress in establishing reimbursement arrangements with third-party payors;
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the
cost of expanding our commercial operations, including our selling and marketing efforts;
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the
rate of progress and cost of research and development activities associated with expansion
of our products;
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the
rate of progress and cost of research and development activities associated with products
in the research phase focused on neurodegenerative disease;
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the
costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual
property rights;
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the
effect of competing technological and market developments;
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the
cost and delays in product development as a result of any changes in regulatory oversight
applicable to our products; and
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the
economic and other terms and timing of any collaborations, licensing or other arrangements
into which we may enter.
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Until
we can generate a sufficient amount of product revenues to finance our cash requirements, which we may never do, we expect to
finance future cash needs primarily through public or private equity offerings, debt financings, borrowings or strategic collaborations. The
issuance of equity securities may result in dilution to stockholders. We do not know whether additional funding will be available
on acceptable terms, or at all. If we are not able to secure additional funding when needed, we may have to delay, reduce the
scope of or eliminate one or more research and development programs or selling and marketing initiatives. In addition, we
may have to work with a partner on one or more of our product development programs or market development programs, which would
lower the economic value of those programs to our company.