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, 2019, filed with the United States Securities and Exchange Commission (the SEC) on September 6, 2019.
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 April 26, 2016, we formed a subsidiary, Cell MedX (Canada) Corp., (the Subsidiary) under the laws of the Province of British Columbia, in anticipation of increased business activity in Canada. As of the day of this Quarterly Report on Form 10-Q the Subsidiary is engaged in manufacturing, distribution, and further development of eBalance® Technology.
Recent Corporate Developments
The following corporate developments occurred during the quarter ended February 29, 2020, and up to the date of the filing of this report:
Convertible Loan Agreements
During the quarter ended February 29, 2020, in order to support our daily operations and to secure required working capital, we entered into several short-term convertible loan agreements with a lenders for a total of $55,000 in exchange for unsecured notes payable due on demand and accumulating 6% annual interest compounded monthly. At the discretion of the lender, the balance of the notes payable may be converted to units of the Companys common stock at the price of the then-current private placement financing. Subsequent to February 29, 2020, we advanced further $20,000 from the same lender under substantially the same terms. Pursuant to the loan agreements, the lenders may convert any portion of principal and/or interest accrued thereon into restricted units of our common stock on the terms and at a conversion price of the then-current private placement offering.
Consulting agreement for Investor Relations
On April 3, 2020, we entered into a consulting agreement for investor relation services (the IR Agreement). Based on the IR Agreement we issued to the consultant 100,000 shares of our common stock and agreed to a monthly consulting fee of $2,000 commencing on April 1, 2020.
2
Reacquisition of Worldwide Exclusive Distribution Rights for the eBalanceⓇ Device
On January 29, 2020, we entered into a buyback agreement (the Buyback Agreement) with Live Current Media Inc. (LIVC). Pursuant to the terms of the Buyback Agreement we agreed to reacquire the worldwide exclusive direct to consumer rights for distribution of our eBalance® devices (the Direct Rights), which we originally granted to LIVC under the distribution agreement (the Underlying Agreement) dated for reference, March 21, 2019. In order to reacquire the Direct Rights, we agreed to pay LIVC a royalty on all sales of the eBalance® device up to an aggregate $507,500 calculated as follows:
1.$25 per eBalance® device sold, not to exceed 3,500 eBalance® devices; and
2.$5 per month for each eBalance® device generating recurring monthly revenue, up to an aggregate royalty of $420,000.
Should we decided to cancel the recurring monthly fee due to a change in our distribution model, the royalty will be replaced by a one-time payment of $145 per eBalance® device sold up to an aggregate of $507,500.
In addition to the royalty, we issued to LIVC share purchase warrants (the Warrants) entitling LIVC to purchase up to two million shares of our common stock as follows:
1.1,000,000 shares at $0.50 per share (the $0.50 Warrant) expiring on March 12, 2023
2.1,000,000 shares at $1.00 per share (the $1.00 Warrant) expiring on March 12, 2023
At our discretion we can accelerate expiry date of the warrants such that if the weighted average closing price (the WAP) of our shares over any 30 consecutive trading-day period is equal to or greater than $1.00 per share, the expiry date of the $0.50 Warrant can be accelerated to 30 days following the acceleration notice given by us to LIVC, and if the WAP is equal to or greater than $1.75 per share, the expiry date of the $1.00 Warrant may be accelerated to 30 days following the acceleration notice.
Update on eBalanceⓇ Research and Development Activities
At the end of February 2020, we completed an audit required for certification of our quality management systems (QMS) under Stage 2 Medical Device Single Audit Program (MDSAP) and under ISO 13485:2016 standard. The audit was carried out by BSI Group Canada Inc. (BSI) and included the following:
-The effectiveness of our QMS incorporating the applicable regulatory requirements outlined by ISO13485:2016 standard and as required under MDSAP;
-Product/process-related technologies;
-Adequate technical documentation for our eBalance® device in relation to ISO13485:2016 standard and MDSAP; and
-Our ability to comply with these requirements.
The assessment report was finalized in mid-March 2020 with a recommendation for certification upon final report review. On March 31, 2020, we received Certificate No. FM 716345, certifying that the Company operates a Quality Management System which complies with the requirements of ISO 13485:2016 for design, development and manufacture of microcurrent therapeutic devices for wellness and pain relief.
We anticipate receiving the MDSAP certification within the next 60 days, at which time we will be eligible to apply to Health Canada for a Class II Medical Device License.
Current uncertainty with respect to rapid expansion of the COVID-19 pandemic
We are cognizant of the rapid expansion of the COVID-19 pandemic and the resulting global implications. To date, there has been no disruptions to our day-to-day operations. However, we caution that there continues to be a possibility for potential future implementation of certain restrictions. The impact of these restrictions on our operations, if implemented, is currently unknown but could be significant.
3
Results of Operations for the Three and Nine Months ended February 29, 2020 and February 28, 2019
Our operating results for the three- and nine-month periods ended February 29, 2020 and February 28, 2019, and the changes in the operating results between those periods are summarized in the table below.
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
February 29,
2020
|
February 28,
2019
|
Percentage
Increase/
(Decrease)
|
February 29,
2020
|
February 28,
2019
|
Percentage
Increase/
(Decrease)
|
Sales
|
$
|
2,380
|
$
|
-
|
n/a
|
$
|
14,480
|
$
|
-
|
n/a
|
Distribution rights
|
|
6,562
|
|
-
|
n/a
|
|
25,000
|
|
-
|
n/a
|
Cost of goods
|
|
(1,840)
|
|
-
|
n/a
|
|
(7,737)
|
|
-
|
n/a
|
Gross margin
|
|
7,102
|
|
-
|
n/a
|
|
31,743
|
|
-
|
n/a
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
546
|
|
343
|
59.2%
|
|
1,359
|
|
453
|
200.0%
|
Consulting fees
|
|
63,271
|
|
66,732
|
(5.2)%
|
|
214,270
|
|
197,370
|
8.6%
|
Distribution expenses
|
|
18,968
|
|
-
|
n/a
|
|
54,588
|
|
-
|
n/a
|
General and administrative expenses
|
|
69,442
|
|
35,953
|
93.1%
|
|
288,084
|
|
87,643
|
228.7%
|
Research and development costs
|
|
109,115
|
|
64,033
|
70.4%
|
|
265,722
|
|
247,400
|
7.4%
|
Total operating expenses
|
|
261,342
|
|
167,061
|
56.4%
|
|
824,023
|
|
532,866
|
54.6%
|
Financing costs
|
|
-
|
|
218,665
|
(100.0)%
|
|
-
|
|
219,052
|
(100.0)%
|
Interest
|
|
4,575
|
|
4,941
|
(7.4)%
|
|
15,310
|
|
9,731
|
57.3%
|
Loss on reacquisition of distribution rights
|
|
102,093
|
|
-
|
n/a
|
|
102,093
|
|
-
|
n/a
|
Net loss
|
$
|
360,908
|
$
|
390,667
|
(7.6)%
|
$
|
909,683
|
$
|
761,649
|
19.4%
|
Revenues
During the three-month period ended February 29, 2020, we recognized $2,380 (CAD$3,125) in revenue, which consisted of sales of our eBalance® wellness devices to end-users and monthly recurrent revenue associated with operating eBalance® wellness devices. The cost attributed to this revenue was $1,840 and included $266 in royalties we accrued on the sales.
During the nine-month period ended February 29, 2020, we recognized $14,480 (CAD$19,125) in revenue, which consisted of sales of our eBalance® wellness devices to end-users and monthly recurrent revenue associated with operating eBalance® wellness devices. The cost attributed to this revenue was $7,737 and included $1,679 in royalties we accrued on the sales.
On June 6, 2019, we entered into a letter of intent for the wholesale distribution rights to all Mainland China, not including Hong Kong (the LOI). As part of the LOI the potential distributor (the Distributor) paid a non-refundable fee of $25,000, which we amortized over the term of the LOI, and as of February 29, 2020, the full $25,000 deposit was recognized as revenue. During the three months ended February 29, 2020, we recognized $6,562 in revenue. As of February 29, 2020, the LOI expired, and we did not enter into a definitive agreement with the Distributor.
We did not generate any revenue during the three and nine-month periods ended February 28, 2019.
As of the date of this report on Form 10-Q, we continue research and further development of our eBalance® Technology and devices based on this technology, we are also working towards certifying our device with Health Canada as Class II medical device, and compiling required documentation for a 510(K) premarket submission with FDA, which allows to demonstrate that the eBalance® device is at least as safe and effective as a legally marketed device available on the market, which, if the submission is approved, will allow us to start our commercial activity in the USA. Until we receive Health Canada and FDA approvals, we will only be able to sell our devices as wellness devices in Canada, which will limit our potential revenue in a foreseeable future due to a smaller market share.
4
Operating Expenses
During the three-month period ended February 29, 2020, our operating expenses increased by 56.4% from $167,061 incurred during the three months ended February 28, 2019, to $261,342 we incurred during the three months ended February 29, 2020. The most significant expenses during this period included $109,115 we incurred in research and development fees (February 28, 2019 - $64,033), $63,271 in consulting fees (February 28, 2019 - $66,732), $20,445 in corporate communication fees recorded as part of general and administrative expenses (G&A) (February 28, 2019 - $7,096), $18,968 we incurred in distribution expenses we paid or accrued to our sales representatives, and $9,794 in professional fees also recorded as part of G&A (February 28, 2019 - $Nil).
On a year-to-date basis, the most significant changes were as follows:
·During the nine-month period ended February 29, 2020, our consulting fees increased by $16,900, from $197,370 we incurred during the nine-month period ended February 28, 2019, to $214,270 we incurred during the nine months ended February 29, 2020. Larger consulting fees during the nine-month period ended February 29, 2020, were associated with $25,000 we paid for consultation on setting up our distribution channels in China.
·Our research and development fees for the nine-month period ended February 29, 2020, increased by $18,322, from $247,400 we incurred during the nine-month period ended February 28, 2019, to $265,722 we incurred during the nine months ended February 29, 2020. The higher research and development fees during the nine-month period ended February 29, 2020, were associated with the MDSAP audit in February of 2020, as well as preparation of the QRM systems required under MDSAP and ISO 13485:2016 standard certification. During our second quarter of Fiscal 2020, our research and development efforts were associated with integration of automated billing module into the eBalance® wellness devices operating system, and various smaller upgrades to improve user experience.
·During the nine-month period ended February 29, 2020, we incurred $54,588 in distribution expenses we paid or accrued to our sales representatives, who began working on distribution of our eBalance® devices in British Columbia, Canada (February 28, 2019 - $Nil). Based on our agreements with the sales representatives, we agreed to pay CAD$350 as commission for each eBalance® device they sell. In order to allow our sales representatives to establish their customer base, we agreed to a monthly fee of CAD$5,000 payable to each sales representative for an initial term of three months, which we extended on a month-to-month basis.
·Our general and administrative fees for the nine-month period ended February 29, 2020, increased by $200,441, or 228.7%, from $87,643 we incurred during the nine-month period ended February 28, 2019, to $288,084 we incurred during the nine months ended February 29, 2020. The largest factor that contributed to this change was associated with our expenditures on corporate communications per our services agreement with Think Ink Marketing, which resulted in $159,964 we recorded during the nine-month period ended February 29, 2020, as compared to $8,874 we incurred during the nine-month period ended February 28, 2019. Other factors that affected our general and administrative fees were associated with a $19,367 increase to our accounting and audit fees, which increased from $7,574 during the nine-month period ended February 28, 2019, to $26,941 during the nine-month period ended February 29, 2020, marketing and advertising fees, which increased by $13,983 as opposed to not having any expenses of this type during the comparative period ended February 28, 2019, a $9,612 increase in professional fees from $182 we incurred during the nine months ended February 28, 2019, to $9,794 we incurred during the nine months ended February 29, 2020, and a $4,441 increase in office expenses from $4,685 we incurred during the nine months ended February 28, 2019, to $9,126 we incurred during the nine months ended February 29, 2020. These increases were in part offset by $7,800 decrease in management fees, which amounted to $33,600 during the nine months ended February 29, 2020, as opposed to $41,400 we incurred in the comparative period.
5
Other Items
During the three-month period ended February 29, 2020, we accrued $4,575 (February 28, 2019 - $4,941) in interest associated with the outstanding notes payable. On a year-to-date basis, we accrued $15,310 in interest on the outstanding notes payable (February 28, 2019 - $9,731). Of this interest, during the nine-month period ended February 29, 2020, we accrued $2,531 (February 28, 2019 - $6,531) on the notes payable we issued to Mr. Jeffs, our major shareholder, and $5,235 (February 28, 2019 - $2,253) we accrued on the Credit Line with Mr. Jeffs.
During the three and nine-month periods ended February 29, 2020, we recorded $102,093 loss on reacquisition of distribution rights from Live Current Media Inc. We did not have similar expenses during the comparative periods ended February 28, 2019.
During the three and nine-month periods ended February 29, 2020 we recorded $218,665 and $219,052 in financing costs, respectively. These costs were associated with a one-time set-up fee of $25,000 we agreed to pay on Credit Line with Mr. Jeffs; and $193,665 being the fair market value of non-transferable share purchase warrants to acquire up to 7,482,960 common shares we issued to Mr. Jeffs for the Line of Credit and for the funds we received from Mr. Jeffs prior to the Credit Line.
Liquidity and Capital Resources
Working Capital
|
As at
February 29,
2020
|
|
As at
May 31,
2019
|
|
Percentage
Change
|
Current assets
|
$
|
222,172
|
|
$
|
189,260
|
|
17.4%
|
Current liabilities
|
|
1,691,307
|
|
|
1,963,100
|
|
(13.8)%
|
Working capital deficit
|
$
|
(1,469,135)
|
|
$
|
(1,773,840)
|
|
(17.2)%
|
As of February 29, 2020, we had a cash balance of $113,064, a working capital deficit of $1,469,135 and cash flows used in operations of $695,398 for the period then ended. During the nine-month period ended February 29, 2020, we funded our operations with $486,000 received from our private placement financing, $15,000 we borrowed under short-term non-interest bearing advances, and $252,650 we received under convertible loan agreements accumulating interest at 6% per annum, compounded monthly, and due on demand.
We did not generate sufficient cash flows from our operating activities to satisfy our cash requirements for the period ended February 29, 2020. The amount of cash we have generated from our operations to date is significantly less than our current debt obligations. There is no assurance that we will be able to generate sufficient cash from our operations to repay the amounts owing under the outstanding 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 29,
2020
|
|
February 28,
2019
|
Cash flows used in operating activities
|
$
|
(695,398)
|
|
$
|
(205,511)
|
Cash flows used in investing activities
|
|
(2,463)
|
|
|
(1,915)
|
Cash flows provided by financing activities
|
|
753,650
|
|
|
325,875
|
Effects of foreign currency exchange on cash
|
|
103
|
|
|
4,212
|
Net increase in cash during the period
|
$
|
55,892
|
|
$
|
122,661
|
6
Net Cash Used in Operating Activities
Net cash used in operating activities during the nine months ended February 29, 2020, was $695,398. This cash was primarily used to cover our cash operating expenses of $785,600, to decrease our accrued liabilities by $20,255, unearned revenue by $6,814, and amounts due to related parties by $11,962. These uses of cash were offset by $19,810 decrease in other current assets, $3,757 decrease in inventory, and by $105,666 increases in our accounts payable.
Net cash used in operating activities during the nine months ended February 28, 2019, was $205,511. This cash was primarily used to cover our cash operating expenses of $537,048, to increase our inventory and work in progress by $53,607, and to decrease our accrued liabilities by $13,100. These uses of cash were offset by increases in our accounts payable and amounts due to related parties of $111,836 and $35,752, respectively, by $656 decrease to our current assets and $250,000 increase in unearned revenue associated with a deposit we received under the LOI with Live Current Media, Inc.
Non-cash transactions
During the nine-month period ended February 29, 2020, our net loss was affected by the following expenses that did not have any impact on cash used in operations:
·$102,093 (2019 - $Nil) we recognized as loss on reacquisition of distribution rights from LIVC pursuant to the Buyback Agreement dated January 29, 2020;
·$15,310 (2019 - $9,731) in interest we accrued on the outstanding notes payable. Of this interest, $2,531 (2019 - $6,531) was accrued on the notes payable we issued to Mr. Jeffs, and $5,235 (2019 - $2,253) was accrued on the $250,000 Credit Line provided to us by Mr. Jeffs;
·$Nil (2019 - $219,052) in financing fees associated with short-term loan agreements and the Credit Line with Mr. Jeffs;
·$5,321 loss (2019 - $4,635 gain) in unrealized foreign exchange, which resulted from fluctuations of Canadian dollar in relation to US dollar, our functional and reporting currency ; and
·$1,359 (2019 - $453) in amortization of equipment we acquired for our manufacturing operations and for our office.
Net Cash Provided by Financing Activities
During the nine-month period ended February 29, 2020, we received $252,650 under convertible loan agreements, which are payable on demand and accumulate interest at 6% per annum. At discretion of the lenders, the full amount due under the loans can be converted into the units of our common stock at the then-current price of private placement financing. In addition, we received a total of $15,000 in non-interest-bearing advances which are payable on demand. In addition to the funds received as part of debt financing, we received $486,000 on issuance of 4,050,000 units of our common stock. We did not incur any share-issuance costs associated with the units issued as part of the private placement financing.
During the nine-months ended February 28, 2019, we borrowed a total of $23,029 (CAD$30,000) from Mr. Jeffs. Of this amount CAD$20,000 in principal bore interest at 12% per annum, compounded monthly, was unsecured and payable on demand; and CAD$10,000 was advanced as a non-interest-bearing short-term loan. In addition, we borrowed $23,975 (CAD$31,200) from an unrelated party. The loan bears interest at 6% per annum and is compounded monthly. During the same period, we borrowed a total of $28,871 from unrelated parties under non-interest-bearing advances which are payable on demand.
During the nine-months ended February 28, 2019, we received $250,000 under the Line of Credit provided to us by Mr. Jeffs. The balance borrowed under the Line of Credit together with a $25,000 set-up fee accumulated interest at a rate of 6% per annum and were payable on demand.
7
Net Cash Used in Investing Activities
During the nine-month period ended February 29, 2020, we used $2,463 to acquire office equipment.
During the nine-month period ended February 28, 2019, we used $1,915 to acquire equipment required for the manufacturing and testing of our eBalance® devices.
Going Concern
The notes to our unaudited interim condensed consolidated financial statements as at February 29, 2020, disclose our uncertain ability to continue as a going concern. Our current business operations are in an early development stage and as such, we were able to generate only minimal revenue from the operations. Our research and development as well as marketing plans for the near future will require large capital expenditures, which we are planning to mitigate through equity or debt financing, or combination of both. In addition, we anticipate continuing to require upfront deposits from our potential distributors, once additional geographical distribution zones are determined.
We have accumulated a deficit of $7,866,505 since inception and increased sales 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 audited 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.