Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited interim consolidated financial statements, the notes to those financial statements and other financial information appearing elsewhere in this document. In addition to historical information, the following discussion and other parts of this document contain forward-looking statements that reflect plans, estimates, intentions, expectations and beliefs. Actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those set forth in the "Risk Factors" in Part II, Item 1A of this Quarterly Report.
The discussion provided in this Quarterly Report should be read in conjunction with our Annual Report on Form 10-K for the year ended May 31, 2016, filed with the United States Securities and Exchange Commission (the SEC) on September 13, 2016.
Overview
We were incorporated as Plandel Resources, Inc. under the laws of the State of Nevada on March 19, 2010. On March 24, 2014, we changed our name to Sports Asylum, Inc. and on September 30, 2014, we changed our name to Cell MedX Corp. to reflect our current business direction.
On November 25, 2014, we completed the acquisition of a proprietary method for the application of bioelectric signaling to treat diabetes and related ailments (the eBalance Technology). With our acquisition of the eBalance Technology, we have shifted our business direction to the discovery, development and commercialization of therapeutic and non-therapeutic products that promote general wellness and alleviate complications associated with medical conditions including, but not limited to, diabetes, Parkinsons disease, and high blood pressure.
On November 26, 2014, we formed a subsidiary, Avyonce Cosmedics Inc., (Avyonce) under the laws of the Province of British Columbia. Avyonces main business activity was channelled towards the resale and marketing of spa technology and equipment to the worldwide beauty and wellness industry. We divested of Avyonce in January of 2017, to allow us to concentrate our efforts on our core business.
On April 26, 2016, we formed a subsidiary, Cell MedX (Canada) Corp., (Cell MedX Canada) under the laws of the Province of British Columbia, in anticipation of increased business activity in Canada.
Update on Observational Clinical Study
During the period ended February 28, 2017, the Company, with the assistance of Nutrasource Diagnostics Inc., has secured the main research facility in Hamilton, Ontario, completed an investigational protocol as well as Informed Consent and Ethics Board submission documentation, in an anticipation to enter regulated clinical trials (the Study). The Company received Health Canadas approval to commence the Study on January 12, 2017. The approval from the Ethics Review Board was received on January 30, 2017.
With all required approvals in place, Dr. Richard Tytus, the Lead Investigator on the Study, and his team at Hamilton Medical Research Group commenced screening for qualified subjects in late February of 2017. As of the day of this Quarterly Report on Form 10-Q, the group of study participants had been increased to 37, with 29 subjects having started their three-month eBalance therapy.
The intent of the Study is to assess the impact of three months of eBalance therapy as an adjunct treatment, on HbA1c in Type 1 and Type 2 diabetics. The secondary endpoints of the Study will observe changes from baseline and medical history in the following;
·
Insulin sensitivity
·
Diabetic neuropathy
·
Diabetic foot pain and numbness
·
Wound healing
·
Blood pressure
·
Kidney function
·
Any other changes reported by patients
2
Recent Corporate Developments
The following corporate developments occurred during the quarter ended February 28, 2017, and up to the date of the filing of this report:
Change in Management
On January 23, 2017, Ms. Jean Arnett resigned as our Vice President, Corporate Strategy and as our director. Ms. Arnetts resignation was not caused by any disagreement with the Company, whether related to our operations, policies, practices or otherwise. To fill the vacancy the board of directors appointed Bradley Hargreaves, our current VP, Technology and Operaitons, as a director.
Divestiture of Avyonce Cosmedics Inc.
On January 23, 2017, our board of directors approved the divestiture of Avyonce. To complete the divestiture, the Company has orally agreed to transfer Avyonce to Ms. Jean Arnett for nominal consideration. For accounting purposes, the divestiture was made effective as of December 31, 2016. Upon transferring Avyonce to Ms. Arnett, the Company and Avyonce agreed to forgive all intercompany debt outstanding at December 31, 2016, which translated into USD$63,503 (CAD$85,265). The decision to divest Avyonce was made in order to allow the Company to better concentrate on upcoming observational clinical studies of its eBalance Technology, while simultaneously continuing the development of therapeutic and non-therapeutic devices based on the eBalance Technology.
Loan Agreements
During the quarter ended February 28, 2017, we entered into a number of loan agreements for a total of $141,697, of which CAD$40,000 were lent to us by Mr. Richard Jeffs, our major shareholder. The loans bear interest at 6% per annum, compounded monthly, are unsecured and payable on demand.
eBalance Pro Wellness Devices
During the quarter ended February 28, 2017, we received additional 20 eBalance Pro wellness devices. The Company plans to use several of these devices in its observations and in the Study as well as to obtain all required regulatory approvals.
Results of Operations for the Three and Nine Months Ended February 28, 2017 and February 29, 2016
Our operating results for the three and nine-month periods ended February 28, 2017 and February 29, 2016, and the changes in the operating results between those periods are summarized in the table below.
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|
|
|
|
|
|
|
|
| |
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
February 28,
2017
|
February 29,
2016
|
Percentage
Change
|
February 28,
2017
|
February 29,
2016
|
Percentage
Change
|
Sales
|
$
|
516
|
$
|
2,602
|
(80.2)%
|
$
|
6,220
|
$
|
8,251
|
(24.6)%
|
Cost of goods sold
|
|
460
|
|
1,335
|
(65.5)%
|
|
4,051
|
|
5,437
|
(25.5)%
|
Gross margin
|
|
56
|
|
1,267
|
(95.6)%
|
|
2,169
|
|
2,814
|
(22.9)%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
24,014
|
|
3,420
|
602.2%
|
|
60,535
|
|
9,920
|
510.2%
|
Consulting fees
|
|
73,263
|
|
72,592
|
0.9%
|
|
224,010
|
|
262,302
|
(14.6)%
|
General and administrative expenses
|
|
121,379
|
|
32,737
|
270.8%
|
|
216,842
|
|
153,420
|
41.3%
|
Research and development costs
|
|
52,782
|
|
15,643
|
237.4%
|
|
192,807
|
|
594,367
|
(67.6)%
|
Stock-based compensation
|
|
22,453
|
|
164,022
|
(86.3)%
|
|
100,656
|
|
770,888
|
(86.9)%
|
Total operating expenses
|
|
293,891
|
|
288,414
|
1.9%
|
|
794,850
|
|
1,790,897
|
(55.6)%
|
|
|
|
|
|
|
|
|
|
|
|
Accretion expense
|
|
(8,906)
|
|
-
|
n/a
|
|
(22,636)
|
|
-
|
n/a
|
Gain on sale of equipment
|
|
-
|
|
-
|
n/a
|
|
-
|
|
2,979
|
(100.0)%
|
Interest
|
|
(1,836)
|
|
(8,868)
|
(79.3)%
|
|
(22,827)
|
|
(19,953)
|
14.4%
|
Loss on settlement of debt
|
|
-
|
|
-
|
n/a
|
|
(805,353)
|
|
-
|
n/a
|
Net loss
|
$
|
(304,577)
|
$
|
(296,015)
|
2.9%
|
$
|
(1,643,497)
|
$
|
(1,805,057)
|
(9.0)%
|
3
Revenues
Our revenue during the three and nine-month periods ended February 28, 2017, and during the comparative period ended February 29, 2016, consisted of sales of consumables for the spa industry. Due to the current concentration on research and development of our eBalance Technology and devices based on this technology, as well as divestiture of Avyonce, we do not expect to have significant operating revenue in the foreseeable future.
Operating Expenses
During the three-month period ended February 28, 2017, our operating expenses increased by 1.9% from $288,414 incurred during the three months ended February 29, 2016, to $293,891 incurred during the three months ended February 28, 2017. Relatively comparable results were affected by $141,569 reduction in stock-based compensation, mainly due to the vesting terms of the options granted during our Fiscal 2015 and 2016, which was offset by increases in general and administrative expenses of $88,642, which increased from $32,737 incurred during the nine-month period ended February 29, 2016, to $121,379 we incurred during the nine-month period ended February 28, 2017; $37,139 increase in research and development fees associated with our Clinical Study; and $20,594 increase in amortization expense we recorded on equipment that we are using for our research and further development of our Technology.
During the nine-month period ended February 28, 2017, our operating expenses decreased by 55.6% from $1,790,897 incurred during the nine months ended February 29, 2016, to $794,850 incurred during the nine months ended February 28, 2017. The most significant year-to-date changes were as follows:
·
Our research and development fees for the nine-month period ended February 28, 2017, decreased by $401,560, from $594,367 we incurred during the nine months ended February 29, 2016 to $192,807 we incurred during the nine months ended February 28, 2017. The higher research and development fees during the comparative period were directly attributed to $496,345 we recorded as fair value of options to acquire up to 2,500,000 shares of our common stock which we granted to Ms. Arnett and Mr. Hargreaves in connection with our acquisition from them of the eBalance Technology pursuant to our Technology Purchase Agreement, as amended.
·
Our stock-based compensation for the nine-month period ended February 28, 2017, decreased by $670,232, from $770,888 we incurred during the nine months ended February 29, 2016 to $100,656 we incurred during the nine months ended February 28, 2017. The stock-based compensation included $89,056 (2015 - $216,512) in fair market value of the options we granted to Dr. Sanderson pursuant to his consulting agreement with us, and $11,600 (2015 - $554,376) in fair market value of the options we granted to Mr. McEnulty pursuant to his option agreement with us.
·
During the nine-month period ended February 28, 2017, our consulting fees decreased by $38,292, from $262,302 we incurred during the nine months ended February 29, 2016, to $224,010 we incurred during the nine months ended February 28, 2017. The decrease was mainly associated with a change in consulting arrangements with Ms. Arnett and Mr. Hargreaves - the vendors of our eBalance Technology.
·
Our general and administrative fees for the nine-month period ended February 28, 2017, increased by $63,422, or 41.3%, from $153,420 we incurred during the nine months ended February 29, 2016 to $216,842 we incurred during the nine months ended February 28, 2017. The largest factors that contributed to this increase were associated with an increase in our corporate communication fees of $65,750, travel fees of $25,888, loss on foreign exchange of $7,259 and filing and regulatory fees of $1,585. These increases were in part offset by decreases in rent fees of $19,635 accounting and audit fees of $6,282, salaries and wages of $6,992, and professional fees of $2,321.
·
During the nine-month period ended February 28, 2017, we recorded $60,535 in amortization on our equipment used in observations and research and development. During the comparative period ended February 29, 2016, our amortization expense was $9,920.
4
Other Items
·
During the nine-month period ended February 28, 2017, we accrued $22,827 (2016 - $19,953) in interest associated with the outstanding notes payable. Of this interest, $6,186 (2016 - $4,953) was accrued on notes payable we issued to Mr. Jeffs, our major shareholder.
·
During the nine-month period ended February 29, 2016, we recorded $2,979 in a gain on sale of equipment which we sold to Mr. Hargreaves for total proceeds of $19,301. We did not have similar transactions during the nine-month period ended February 28, 2017.
·
During the nine-month period ended February 28, 2017, we recorded $22,636 (2016 - $Nil) in accretion expense which resulted from the difference between the 6% stated interest rate and the 77.51% implied interest rate we used to determine the fair value of the proceeds we received pursuant to the $50,000 term loan with Mr. Jeffs.
·
During the nine-month period ended February 28, 2017, we recorded $805,353 (2016 - $Nil) in loss on settlement of debt when our debt holders chose to convert $1,006,691 owed to them into units of our common stock as part of the non-brokered private placement financing we closed on October 12, 2016 (the Offering). The loss resulted from the difference between the conversion price, being $0.15 per unit, and the fair market value of our common stock on the closing of the Offering, being $0.27 per share.
Liquidity and Capital Resources
Working Capital
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|
|
|
| |
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As at
|
As at
|
|
|
February 28,
2017
|
February 29,
2016
|
Percentage
Change
|
Current assets
|
$
|
78,909
|
$
|
61,844
|
27.6%
|
Current liabilities
|
|
1,106,736
|
|
1,681,479
|
(34.2)%
|
Working capital deficit
|
$
|
(1,027,827)
|
$
|
(1,619,635)
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(36.5)%
|
As of February 28, 2017, we had a cash balance of $9,140, a working capital deficit of $1,027,827 and cash flows used in operations of $560,130 for the period then ended. During the nine-month period ended February 28, 2017, we funded our operations with $357,500 we received from subscriptions to the units of our common stock, we issued as part of our Offering, $104,129 (CAD$136,500) we received from Mr. Jeffs, our major shareholder, and with $186,336 we received from non-related parties. See Net Cash Provided By Financing Activities.
We did not generate sufficient cash flows from our operating activities to satisfy our cash requirements for the period ended February 28, 2017. The amount of cash that we have generated from our operations to date is significantly less than our current debt obligations, including our debt obligations under our remaining notes payable. There is no assurance that we will be able to generate sufficient cash from our operations to repay the amounts owing under these notes and advances payable, or to service our other debt obligations. If we are unable to generate sufficient cash flow from our operations to repay the amounts owing when due, we may be required to raise additional financing from other sources. The outcome of these matters cannot be predicted with any certainty at this time and raises substantial doubt that we will be able to continue as a going concern.
Cash Flows
|
|
|
| |
|
Nine months ended
|
|
February 28,
2017
|
February 29,
2016
|
Cash flows used in operating activities
|
$
|
(560,130)
|
$
|
(337,763)
|
Cash flows used in investing activities
|
|
(110,234)
|
|
(33,548)
|
Cash flows provided by financing activities
|
|
650,649
|
|
381,788
|
Effects of foreign currency exchange on cash
|
|
1,294
|
|
3,060
|
Net increase (decrease) in cash during the period
|
$
|
(18,421)
|
$
|
13,537
|
5
Net Cash Used in Operating Activities
Net cash used in operating activities during the nine months ended February 28, 2017, was $560,130. This cash was primarily used to cover our cash operating expenses of $629,246, to increase our current assets by $38,344, and to reduce our accrued liabilities by $28,630. These uses of cash were offset by decrease in our inventory of $959, and by increases in our accounts payable and amounts due to related parties of $69,472 and $34,188, respectively. In addition, we recorded $31,471 in unearned revenue associated with the deposits we received on the eBalance Pro Wellness devices.
Net cash used in operating activities during the nine months ended February 29, 2016, was $337,763. This cash was primarily used to cover our cash operating expenses of $500,952, and to increase our other current assets associated mainly with deposits we made for the manufacture of 25 eBalance devices by $101,358. In addition, we used cash to increase our inventory by $601 and decrease the accrued liabilities by $19,134. These uses of cash were offset by increases in our accounts payable of $101,008, as well as increases in the amounts due to related parties of $153,959. In addition, we received $29,315 as payments for the spa equipment, which we recorded as unearned revenue pending delivery of the equipment to our customers.
Non-cash transactions
During the nine-month period ended February 28, 2017, our net loss was affected by the following expenses that did not have any impact on cash used in operations:
·
$805,353 in loss on settlement of debt we recorded when our debt holders chose to convert $1,006,691 owed to them into units of our common stock as part of the Offering. The loss resulted from the difference between the conversion price, being $0.15 per unit, and the fair market value of our common stock on the closing of the Offering, being $0.27 per share.
·
$100,656 in stock-based compensation, of which $89,056 was associated with the fair value of the options to purchase up to 2,400,000 shares of our common stock we granted to Dr. Sanderson as compensation for his appointment as our Chief Medical Officer; and $11,600 was associated with the fair value of the options to purchase up to 2,500,000 shares of our common stock we granted to Mr. Frank McEnulty, our CEO and President;
·
$22,827 in interest we accrued on the outstanding notes payable. Of this interest, $6,186 was accrued on the notes payable we issued to Mr. Jeffs, our major shareholder;
·
$22,636 in accretion expense which resulted from the difference between the 6% stated interest rate and the 77.51% implied interest rate we used to determine the fair value of the proceeds we received pursuant to the $50,000 term loan with Mr. Jeffs;
·
$60,535 in amortization expense we recorded on the equipment we use in our research of the eBalance Technology; and
·
$2,244 increase in the loss on foreign exchange, which resulted from fluctuations of Canadian dollar and European Euro denominated transactions
During the nine-month period ended February 29, 2016, our net loss was affected by the following expenses that did not have any impact on cash used in operations:
·
$9,920 in amortization expense we recorded on the equipment that is being used in our research of the eBalance Technology;
·
$770,888 in stock-based compensation, of which $216,512 was associated with the fair value of the options to purchase up to 2,400,000 shares of our common stock we issued to Dr. Sanderson as compensation for his appointment as our Chief Medical Officer; and $554,376 was associated with the fair value of the options to purchase up to 2,500,000 shares of our common stock we issued to Mr. Frank McEnulty, our CEO and President;
6
·
$496,345 in stock-based compensation associated with the fair value of the options to purchase up to 2,500,000 shares of our common stock, which we issued to Ms. Arnett and Mr. Hargreaves as part of the options to purchase up to 20,000,000 shares of our common stock pursuant to our Technology Purchase Agreement, dated for reference November 25, 2014, and which vested on August 26, 2015;
·
$19,953 in interest we accrued on the outstanding notes payable. Of this interest, $4,953 was accrued on the notes payable we issued to Mr. Jeffs, our major shareholder; and
·
$20,364 in stock-based compensation associated with the fair value of the options to purchase up to 150,000 shares of our common stock, which we issued to Mr. Bulwa, as a part of his Consulting Agreement with us.
The above expenses were in part offset by the following non-cash transactions:
·
$10,386 gain that resulted from foreign exchange fluctuations on Canadian dollar denominated transactions; and
·
$2,979 gain we recorded on the sale of our equipment to Ms. Arnett and Mr. Hargreaves; $19,301 in proceeds from the sale were used to reduce amounts owed to Mr. Hargreaves and Ms. Arnett for services they provided to the Company.
Net Cash Provided by Financing Activities
During the nine-month period ended February 28, 2017, we borrowed a total of $186,336 from unrelated parties and $104,129 (CAD$136,500) from our major shareholder. These loans are unsecured, payable on demand and bear interest at 6% per annum, compounded monthly. In addition to the loans, we received $2,684 in non-interest bearing advances from an unrelated party. During the same period we received $357,500 from subscriptions to the units of our common stock under the Offering, which we closed on October 12, 2016.
During the nine months ended February 29, 2016, we borrowed a total of $300,000 from unrelated parties and $142,000 from our major shareholder. The loans are unsecured, payable on demand and bear interest at 6% per annum, compounded monthly. During the same period we repaid $60,212 in non-interest bearing advances, net of any additions, to a non-related party.
Net Cash Used in Investing Activities
During the nine-month period ended February 28, 2017, we paid $110,234 for the equipment which is being used in our observational studies, of this amount $96,217(Euro 89,040) was associated with the manufacturing of our eBalance Pro second generation wellness devices.
During the nine month period ended February 29, 2016, we paid $33,548 for equipment being used for our ongoing research and development of the eBalance Technology and devices.
Going Concern
The notes to our unaudited interim consolidated financial statements at February 28, 2017, disclose our uncertain ability to continue as a going concern. We are development stage company with limited operations. To date we have been able to generate only minimal revenue from the operations of our wholly owned subsidiary, Avyonce, which we divested in January 2017. Our research and development plans for the near future will require large capital expenditures, which we are planning to mitigate through equity or debt financing.
7
We have accumulated a deficit of $4,898,094 since inception and increased financing will be required to fund and support our operations. Our continuation as a going concern depends upon the continued financial support of our shareholders, our ability to obtain necessary debt or equity financing to continue operations, and the attainment of profitable operations. Our unaudited interim consolidated financial statements do not give effect to any adjustments that would be necessary should we be unable to continue as a going concern and therefore be required to realize our assets and discharge our liabilities in other than the normal course of business and at amounts different from those reflected in our financial statements.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies
An appreciation of our critical accounting policies is necessary to understand our financial results. These policies may require management to make difficult and subjective judgments regarding uncertainties, and as a result, such estimates may significantly impact our financial results. The precision of these estimates and the likelihood of future changes depend on a number of underlying variables and a range of possible outcomes. We have applied our critical accounting policies and estimation methods consistently.
Changes in and Disagreements with Accountants on Accounting Procedures and Financial Disclosure
None.