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 condensed consolidated interim 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, 2020, filed with the United States Securities and Exchange Commission (the SEC) on September 15, 2020.
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 new business direction. On April 26, 2016, we formed a subsidiary, Cell MedX (Canada) Corp., (the Subsidiary) under the laws of the Province of British Columbia.
We are a biotech company focused on the discovery, development and commercialization of therapeutic and non-therapeutic products that promote general health, pain relief, wellness and alleviate complications associated with medical conditions including, but not limited to: diabetes, Parkinsons disease, high blood pressure, neuropathy and kidney function. Our Subsidiary is engaged in development and manufacturing of therapeutic devices based on our proprietary eBalance® Technology, which harnesses power of microcurrents and their effects on human body.
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 have 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.
Recent Corporate Developments
The following corporate developments occurred during the quarter ended August 31, 2020, and up to the date of the filing of this report:
Private Placement Financing
On July 30, 2020, we closed our private placement financing and issued 988,000 units for total gross proceeds of $247,000. Each unit consisted of one common share of the Company and one share purchase warrant entitling the holder to purchase one additional common share for a period of two years after closing at an exercise price of $0.35 per share expiring on January 30, 2021, and at $0.50 per share from January 30, 2021 to July 30, 2022.
Exercise of Options
On July 13, 2020, Mr. Hargreaves, our VP, Technology and Operations, and Ms. Arnett, the 10% security holder of the Company, exercised their options to acquire shares of the Companys common stock by acquiring 2,484,855 shares for total proceeds to the Company of $124,243. The remaining options to acquire 15,145 common shares expired unexercised. Ms. Arnett and Mr. Hargreaves chose to apply the balances we owed to them as at August 13, 2020, towards the exercise price of their options.
2
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, and 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, and on June 2, 2020, received a certificate #MDSAP 716274.
Following the receipt of ISO and MDSAP certificates, we filed two separate applications for Class II Medical Device Licenses for the eBalance® Pro System and the eBalance® Home System with Health Canada. On July 17, 2020, Health Canada issued a Class II Medical Device License #104925 for our eBalance® Home System, and on August 18, 2020, issued a Class II Medical Device License #105044 for our eBalance® Pro System.
Prior to selling our eBalance® Home and Pro Systems for the treatment in the United States, we will be required to apply for an approval from the FDA. As of the date of this Quarterly Report on Form 10-Q we are in the process of completing the necessary documentation and testing required for the 510(K) submission to the FDA.
Extension of Investor Outreach Program with Think Ink Marketing
On September 23, 2020, we signed an extension agreement with Think Ink Marketing Data & Email Services, Inc. (Think Ink) to continue providing public relations services in an effort to increase public awareness of the Company and our products, services and securities. The agreement is for twelve months with either party having the right to terminate upon thirty-day notice.
Think Ink is a California-based marketing firm established in 1991 that provides its customers with a complete range of marketing services that span both digital and direct mail venues. The Company has budgeted up to $25,000 per month for the services of Think Ink including banner and native ads.
Results of Operations for the Three Months ended August 31, 2020 and 2019
Our operating results for the three-month periods ended August 31, 2020 and 2019, and the changes in the operating results between those periods are summarized in the table below.
|
Three Months Ended
|
|
|
August 31,
2020
|
August 31,
2019
|
Percentage
Increase/
(Decrease)
|
Sales
|
$
|
1,467
|
$
|
11,343
|
(87.1)%
|
Distribution rights
|
|
-
|
|
8,958
|
(100.0)%
|
Cost of goods sold
|
|
369
|
|
5,375
|
(93.1)%
|
Gross margin
|
|
1,098
|
|
14,926
|
(92.6)%
|
Operating expenses
|
|
|
|
|
|
Amortization
|
|
736
|
|
268
|
174.6%
|
Consulting fees
|
|
76,940
|
|
89,271
|
(13.8)%
|
Distribution expenses
|
|
261
|
|
16,447
|
(98.4)%
|
General and administrative expenses
|
|
32,780
|
|
86,562
|
(62.1)%
|
Research and development costs
|
|
85,137
|
|
60,713
|
40.2%
|
Total operating expenses
|
|
195,854
|
|
253,261
|
(22.7)%
|
Interest
|
|
(6,446)
|
|
(6,952)
|
(7.3)%
|
Net loss
|
$
|
(201,202)
|
$
|
(245,287)
|
(18.0)%
|
3
Revenues
During the three-month period ended August 31, 2020, we recognized $1,467 in revenue, which consisted of monthly recurring revenue associated with the eBalance® treatment packages. The cost attributed to this revenue was $369.
During the three-month period ended August 31, 2019, we recognized $11,343 in revenue, which consisted of sales of our eBalance® wellness devices to end-users. The cost attributed to this revenue was $5,375 and consisted of $4,052 in manufacturing costs of eBalance devices, and $1,323 in royalties we accrued on the sale of each device.
On June 6, 2019, we entered into a letter of intent for the wholesale distribution rights to all Mainlined 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, of which $8,958 we recorded as revenue from distribution rights for the three-month period ended August 31, 2019.
As of the date of this Quarterly Report on Form 10-Q, we continue research and further development of our eBalance® Technology and devices based on this technology. During the summer of 2020, Health Canada granted our eBalance® Home and Pro Systems Class II medical device licenses, which allow us to market our eBalance® devices for wellness and pain management. Our certification with FDA continues to be ongoing; at the time of this Quarterly Report on Form 10-Q we are compiling required documentation for a 510(K) premarket submission, which allows us to demonstrate that the eBalance® device is at least as safe and effective as a legally marketed device available on the market. Once this submission is approved, it will allow us to start our commercial activity in the USA.
Operating Expenses
During the three-month period ended August 31, 2020, our operating expenses decreased by 22.7% from $253,261 incurred during the three-month period ended August 31, 2019, to $195,854 incurred during the three-month period ended August 31, 2020. The most significant changes were as follows:
·Our research and development fees for the three-month period ended August 31, 2020, increased by $24,424, or 40.2%, from $60,713 we incurred during the three-month period ended August 31, 2019, to $85,137 we incurred during the three-month period ended August 31, 2020. The higher research and development fees during the three-month period ended August 31, 2020, were associated with the preparation for the 510(K) submission to the FDA, as well as continued improvement and development of the eBalance® systems.
·Our general and administrative fees for the three-month period ended August 31, 2020, decreased by $53,782, or 62.1%, from $86,562 we incurred during the three-month period ended August 31, 2019, to $32,780 we incurred during the three-month period ended August 31, 2020. The largest factor that contributed to this change was associated with fluctuation in foreign exchange rates, which, during the three-month period ended August 31, 2020, resulted in $42,450 gain, as compared to $3,308 gain during the comparative period; our expenditures on corporate communications decreased by $14,075 to $42,263 we recorded during the three-month period ended August 31, 2020, as compared to $56,338 we incurred during the three-month period ended August 31, 2019. Other factors that affected our general and administrative fees were associated with a $1,989 decrease to our accounting and audit fees, which decreased from $7,000 we incurred during the three-month period ended August 31, 2019, to $5,011 during the three-month period ended August 31, 2020. Our management fees decreased by $4,800 from $13,800 we incurred during the three-month period ended August 31, 2019 to $9,000 we incurred during the three-month period ended August 31, 2020, the decrease resulted from renegotiation of monthly management fees with the Companys CEO and the CFO. In addition, during the current period, we did not incur any marketing and advertising fees as opposed to $4,191 we incurred during the three-month period ended August 31, 2019. These decreases were in part offset by $9,943 in professional fees which we incurred during the three-month period ended August 31, 2020, the expense we did not incur in the comparative period.
4
·During the three-month period ended August 31, 2020, our consulting fees decreased by $12,331, from $89,271 we incurred during the three-month period ended August 31, 2019, to $76,940 we incurred during the three-month period ended August 31, 2020. Larger consulting fees during the comparative period ended August 31, 2019, were associated with $25,000 we paid for consultation on setting up our distribution channels in China.
·During the three-month period ended August 31, 2020, we incurred $261 in distribution expenses we paid or accrued to our sales representatives (August 31, 2019 - $16,447). 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, during the three-month period ended August 31, 2019, we were paying a monthly fee of CAD$5,000. Due to a delay in securing Health Canada Class II device licenses, we suspended our agreements with sales representatives in January 2020. As of the date of this Quarterly Report on Form 10-Q we are discussing the re-engagement of the sales representatives to aid us with the marketing of the eBalance® Home and Pro Systems in Canada.
Other Items
During the three-month period ended August 31, 2020, we accrued $6,446 (August 31, 2019 - $6,952) in interest associated with the outstanding notes payable. Of this interest, $675 (August 31, 2019 - $6,447) represented interest we accrued on the notes payable we issued to Mr. Jeffs, our major shareholder.
Liquidity and Capital Resources
Working Capital
|
As at
August 31,
2020
|
|
As at
May 31,
2020
|
|
Percentage
Change
|
Current assets
|
$
|
235,825
|
|
$
|
157,343
|
|
49.9%
|
Current liabilities
|
|
1,725,773
|
|
|
1,679,523
|
|
2.8%
|
Working capital deficit
|
$
|
(1,489,948)
|
|
$
|
(1,522,180)
|
|
(2.1)%
|
As of August 31, 2020, we had a cash balance of $120,474, a working capital deficit of $1,489,948 and cash flows used in operations of $169,629 for the period then ended. During the three-month period ended August 31, 2020, we funded our operations with $167,000 received from our private placement financing, and $79,773 we borrowed under 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 August 31, 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
|
Three months ended
|
|
August 31,
2020
|
|
August 31,
2019
|
Cash flows used in operating activities
|
$
|
(169,629)
|
|
$
|
(203,682)
|
Cash flows used in investing activities
|
|
(1,574)
|
|
|
(2,463)
|
Cash flows provided by financing activities
|
|
246,773
|
|
|
501,000
|
Effects of foreign currency exchange on cash
|
|
(186)
|
|
|
644
|
Net increase in cash during the period
|
$
|
75,384
|
|
$
|
295,499
|
5
Net Cash Used in Operating Activities
Net cash used in operating activities during the three months ended August 31, 2020, was $169,629. This cash was primarily used to cover our cash operating expenses of $226,997, to decrease our accrued liabilities by $4,456, and to increase other current assets by $4,293. These uses of cash were offset by $38,831 increase in our accounts payable, $31,911 increase in amounts due to related parties, and by a $375 decrease in inventory.
Net cash used in operating activities during the three months ended August 31, 2019, was $203,682. This cash was primarily used to cover our cash operating expenses of $240,972 and to decrease our accounts payable and amounts due to related parties by $3,617 and $13,239, respectively. These uses of cash were offset by $4,215 and $33,295 decreases in our inventory and other current assets, respectively, and by increases in our accrued liabilities and unearned revenue of $7,400 and $9,236 respectively.
Non-cash transactions
During the three-month period ended August 31, 2020, our net loss was affected by the following expenses that did not have any impact on cash used in operations:
·$6,446 (2020 - $6,952) in interest we accrued on the outstanding notes payable. Of this interest, $675 (2020 - $6,477) was accrued on the notes payable we issued to Mr. Jeffs;
·$43,477 (2020 - $2,905) in unrealized foreign exchange gain, which resulted from fluctuations of Canadian dollar in relation to US dollar, our functional and reporting currency ; and
·$736 (2020 - $268) in amortization of equipment we acquired for our manufacturing operations and for our office.
·$5,000 (2020 - $Nil) in non-cash investor relations expenses which were associated with fair market value of the shares we issued to our consultant for investor relation services in April 2020.
Net Cash Used in Investing Activities
During the three-month period ended August 31, 2020, we purchased office equipment for $1,574 (2020 - $2,463).
Net Cash Provided by Financing Activities
During the three-month period ended August 31, 2020, we received $79,773 under loan agreements, which are payable on demand and accumulate interest at 6% per annum. In addition, we received $167,000 on closing of our non-brokered private placement for 988,000 units of our common stock at $0.25 per unit for total proceeds of $247,000, of which $80,000 was received during the year ended May 31, 2020. We did not incur any share-issuance costs associated with the units issued as part of the private placement financing.
During the three-month period ended August 31, 2019, we were advanced a total of $15,000 which is payable on demand. In addition to the advances, we issued 4,050,000 units of our common stock for total proceeds of $486,000. We did not incur any share-issuance costs associated with the units issued as part of the private placement financing.
Going Concern
The notes to our unaudited condensed consolidated financial statements as at August 31, 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 by requiring upfront deposits from our potential distributors, once we begin commercial production of our eBalance® devices.
6
As at August 31, 2020, we had accumulated a deficit of $8,250,722 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 unaudited condensed consolidated interim 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.