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, 2017, filed with the United States Securities and Exchange Commission (the “SEC”) on August 29, 2017.
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, Parkinson’s disease, and high blood pressure.
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 six-month period ended November 30, 2017, Hamilton Medical Research Group, under the guidance of Dr. Richard Tytus, the lead investigator of the clinical study (the “Clinical Study”), Cell MedX Corp. commissioned through Nutrasource Diagnostics Inc. (“Nutrasource”), has completed the Clinical Study and prepared a draft report which at the time of the filing of this Form 10-Q is being finalized by Dr. Tytus.
The Clinical Study was designed to assess the impact of three months of the eBalance therapy, as an adjunct treatment, on HbA1c in thirty (30) Type 1 and Type 2 diabetics. The secondary endpoints of the Clinical Study were defined to observe changes from baseline and medical history of each Clinical Study subject in the following;
·
Insulin sensitivity
·
Diabetic neuropathy
·
Diabetic foot pain and numbness
·
Wound healing
·
Blood pressure
·
Kidney function
·
Any other changes reported by patients
The Company expects to release the report to the public in the second part of January 2018.
2
Recent Corporate Developments
The following corporate developments occurred during the quarter ended November 30, 2017, and up to the date of the filing of this report:
Private Placement
On October 12, 2017, we closed a non-brokered private placement offering (the “Offering”) at a price of $0.25 per unit, by issuing 1,480,000 units for cash proceeds of $370,000. Each unit sold under the Offering 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 three years after closing at an exercise price of $0.50 per share if exercised during the first year, $1.00 per share if exercised during the second year, and $1.50 per share if exercised during the third year.
Debt Restructuring
On August 24, 2017, we entered into negotiations with our debt holders to convert debt owed by us under the notes payable and for services owed into the shares of our common stock at $0.25 per share. We finalized the debt restructure on October 12, 2017, concurrently with the closing of the Offering. The total of $579,536 was converted into 2,318,144 shares of our common stock. As part of the debt restructuring, Frank McEnulty, our director, President, and our former CEO, converted $120,254 in fees owed to him into 481,016 shares.
Product Development Agreement
On October 16, 2017, we entered into a production development agreement (the “Development Agreement”) with Western Robotics Ltd. (“Western Robotics”) with an objective to enhance our eBalance Pro Wellness device based on the Company’s eBalance microcurrent technology and new findings that became evident as part of the Clinical Study and the Company’s ongoing in-house observations. The Company agreed to pay Western Robotics CAD$250,000 as non-refundable engineering fee, of which CAD$125,000 (USD$97,010) has been paid as of the date of this Quarterly Report on Form 10-Q.
Change in Management
On December 1, 2017, we entered into a management consulting agreement (the “Agreement”) with Dr. Terrance Owen. Under the terms of the Agreement, Dr. Owen will act as the Company’s Chief Executive Officer for the term of one year, expiring on November 30, 2018, and renewing automatically for consecutive 1-year terms. Dr. Owen will be paid a consulting fee of CAD$16,666 per month.
Dr. Owen obtained a BSc (Honours) in Biology from the University of Victoria, an MSc in Biology from the University of New Brunswick, a PhD in Zoology from the University of British Columbia, and an MBA from Simon Fraser University.
From December 1980 to April 2002 Dr. Owen was the President and a director of Helix Biotech, a laboratory providing DNA identity testing services for paternity, immigration, and forensic cases. From July 1995 to June 1998 Dr. Owen was the President, a director and a co-founder of Helix BioPharma Corp, listed on the TSX Venture Exchange (TSX:HBP), a generic pharmaceutical company. From 2000 to 2013, Dr. Owen was the President, CEO, director and co-founder of ALDA Pharmaceuticals Corp., an infection control company now named Vanc Pharmaceuticals Inc. (TSX-V:VANC). Dr. Owen was also a co-founder of Champion Pain Care Corporation (OTCQB:CPAI) and was appointed as its CEO from October 2013 to June 2015, as a Director from October 2013 to February 2017, and as CFO from March 2015 to February 2017.
On December 1, 2017, Mr. McEnulty, our director and former Chief Executive Officer, tendered his resignation from his position as CEO. Mr. McEnulty will continue to serve on the Company’s board of directors and as its President.
3
Results of Operations for the Three and Six Months ended November 30, 2017 and 2016
Our operating results for the three- and six-month periods ended November 30, 2017, and 2016, and the changes in the operating results between those periods are summarized in the table below.
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|
|
|
|
|
|
|
|
|
| |
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
November 30,
2017
|
November 30,
2016
|
Percentage
Increase /
(Decrease)
|
November 30,
2017
|
November 30,
2016
|
Percentage
Increase /
(Decrease)
|
|
Sales
|
$
|
-
|
$
|
336
|
(100.0)%
|
$
|
-
|
$
|
5,704
|
(100.0)%
|
|
Cost of goods sold
|
|
-
|
|
180
|
(100.0)%
|
|
-
|
|
3,591
|
(100.0)%
|
|
Gross margin
|
|
-
|
|
156
|
(100.0)%
|
|
-
|
|
2,113
|
(100.0)%
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
38,434
|
|
18,510
|
107.6%
|
|
77,557
|
|
36,521
|
112.4%
|
|
Consulting fees
|
|
61,422
|
|
75,607
|
(18.8)%
|
|
644,881
|
|
150,747
|
327.8%
|
|
General and administrative expenses
|
|
33,586
|
|
51,239
|
(34.5)%
|
|
88,061
|
|
95,463
|
(7.8)%
|
|
Research and development costs
|
|
41,491
|
|
67,173
|
(38.2)%
|
|
88,994
|
|
140,025
|
(36.4)%
|
|
Stock-based compensation
|
|
6,130
|
|
29,306
|
(79.1)%
|
|
106,931
|
|
78,203
|
36.7%
|
|
Total operating expenses
|
|
181,063
|
|
241,835
|
(25.1)%
|
|
1,006,424
|
|
500,959
|
100.9%
|
|
Accretion expense
|
|
-
|
|
7,473
|
(100)%
|
|
-
|
|
13,730
|
(100.0)%
|
|
Interest
|
|
327
|
|
5,596
|
(94.2)%
|
|
8,241
|
|
20,991
|
(60.7)%
|
|
Loss on settlement of debt
|
|
-
|
|
805,353
|
(100.0)%
|
|
-
|
|
805,353
|
(100.0)%
|
|
Net loss
|
$
|
181,390
|
$
|
1,060,101
|
(82.9)%
|
$
|
1,014,665
|
$
|
1,338,920
|
(24.2)%
|
Revenues
We did not generate any revenue during the three- and six-month periods ended November 30, 2017. Our revenue during the comparative periods ended November 30, 2016, consisted of sales of consumables for the spa industry. Due to the current concentration on the research and development of our eBalance Technology and devices based on this technology, as well as the divestiture of Avyonce Cosmedics Inc. (“Avyonce”), our former subsidiary, in our Fiscal 2017, we do not expect to have significant operating revenue in the foreseeable future.
Operating Expenses
During the three-month period ended November 30, 2017, our operating expenses decreased by 25.1% from $241,835 incurred during the three months ended November 30, 2016, to $181,063 incurred during the three months ended November 30, 2017. The decrease was mainly associated with reduced research and development, corporate communication, and consulting fees, as well as decreased stock-based compensation, mainly due to vesting terms of the options granted during our Fiscal 2015 and 2016. These reductions were in part offset by increases to our office expenses and professional fees, as well as amortization we recorded on equipment we use in our observational trials.
During the six-month period ended November 30, 2017, our operating expenses increased by 100.9% from $500,959 incurred during the six months ended November 30, 2016, to $1,006,424 incurred during the six months ended November 30, 2017. The most significant changes were as follows:
·
During the six-month period ended November 30, 2017, our consulting fees increased by $494,134, from $150,747 we incurred during the six-month period ended November 30, 2016 to $644,881 we incurred during the six months ended November 30, 2017. The increase was mainly associated with a fair market value of the options to acquire up to 1,750,000 shares of our common stock we granted to our consultants for business development services.
·
Our research and development fees for the six-month period ended November 30, 2017, decreased by $51,031, from $140,025 we incurred during the six-month period ended November 30, 2016, to $88,994 we incurred during the six months ended November 30, 2017. The lower research and development fees during the comparative period were attributed to moving our production and research activity to Canada, as opposed to having the development outsourced to European manufacturer during the comparative period. In November 2017 we entered into a Development Agreement with Western Robotics to enhance our eBalance Pro Wellness device. We paid Western Robotics $97,010 (CAD$125,000), which at November 30, 2017 were recorded as prepaid research and development fees.
4
·
Our stock-based compensation for the six-month period ended November 30, 2017, increased by $28,728, from $78,203 we incurred during the six months ended November 30, 2016, to $106,931 we incurred during the six months ended November 30, 2017. The stock-based compensation included $89,556 (2016 - $Nil) in fair market value of the options to acquire up to 300,000 shares of our common stock we granted to Ms. Silina pursuant to the stock option agreement with her, and $17,375 (2016 - $66,603) in fair market value of the options to acquire up to 2,400,000 shares of our common stock we granted to Dr. Sanderson pursuant to his option agreement with us. The stock-based compensation for the six-month period ended November 30, 2016, also included $11,600 in fair market value of the options to acquire up to 2,500,000 shares of our common stock we granted to Mr. McEnulty pursuant to the stock option agreement with him.
·
Our general and administrative fees for the six-month period ended November 30, 2017, decreased by $7,402, or 7.8%, from $95,463 we incurred during the six-month period ended November 30, 2016, to $88,061 we incurred during the six months ended November 30, 2017. The largest factors that contributed to this change were associated with decreased corporate communication fees of $2,005 (2016 - $15,541), travel and entertainment expenses of $6,313 (2016 - $14,671), and professional fees of $9,971 (2016 - $12,278). These decreases were in part offset by increased accounting and audit fees of $4,250 (2016 - $740), and foreign exchange expenses of $18,622 (2016 – gain of $1,224).
·
During the six-month period ended November 30, 2017, we recorded $77,557 in amortization on our equipment we use in observations and research and development. During the comparative period ended November 30, 2016, our amortization expense was $36,521. The increased amortization resulted from the change in the estimated useful life of the underlying equipment from three to two years.
Other Items
·
During the six-month period ended November 30, 2017, we accrued $8,241 (2016 - $20,991) in interest associated with the outstanding notes payable. Of this interest, $3,170 (2016 - $5,549) was accrued on notes payable we issued to Mr. Jeffs, a major shareholder.
·
During the six-month period ended November 30, 2016, we recorded $13,730 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. The term loan was fully accreted as at March 3, 2017, as such, we did not record any accretion expense during the six-month period ended November 30, 2017.
·
During the six-month period ended November 30, 2016, we recorded $805,353 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. We did not record any loss on settlement of debt associated with the debt restructure we finalized on October 12, 2017.
Liquidity and Capital Resources
Working Capital
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|
|
|
|
|
|
| |
|
|
As at
November 30, 2017
|
|
As at
May 31, 2017
|
|
Percentage
Change
|
|
Current assets
|
$
|
260,323
|
|
$
|
100,157
|
|
159.9%
|
|
Current liabilities
|
|
981,625
|
|
|
1,463,055
|
|
(32.9)%
|
|
Working capital deficit
|
$
|
(721,302)
|
|
$
|
(1,362,898)
|
|
(47.1)%
|
As of November 30, 2017, we had a cash balance of $108,368, a working capital deficit of $721,302 and cash flows used in operations of $333,204 for the period then ended. During the six-month period ended November 30, 2017, we funded our operations with $370,000 we received from subscriptions to the units of our common stock, which we issued on October 12, 2017, $19,318 (CAD$25,000) we received from Mr. Jeffs, a major shareholder, and $6,000 we received from an unrelated party. See “
Net Cash Provided By Financing Activities
”.
5
We did not generate sufficient cash flows from our operating activities to satisfy our cash requirements for the period ended November 30, 2017. The amount of cash that 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 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
|
|
|
|
|
| |
|
|
Six months ended
November 30,
|
|
|
2017
|
|
2016
|
|
Cash flows used in operating activities
|
$
|
(333,204)
|
|
$
|
(403,305)
|
|
Cash flows used in investing activities
|
|
-
|
|
|
(14,940)
|
|
Cash flows provided by financing activities
|
|
372,614
|
|
|
508,938
|
|
Effects of foreign currency exchange on cash
|
|
1,464
|
|
|
(274)
|
|
Net increase in cash during the period
|
$
|
40,874
|
|
$
|
90,419
|
Net Cash Used in Operating Activities
Net cash used in operating activities during the six months ended November 30, 2017, was $333,204. This cash was primarily used to cover our cash operating expenses of $294,402, to increase our inventory by $6,017, work in progress recorded as part of inventory by $15,116, and current assets by $99,028. The cash used for current assets included $97,010 (CAD$125,000) we paid under our Development Agreement to enhance our eBalance Pro Wellness device. In addition, we used our cash to reduce our accrued liabilities by $74,719. These uses of cash were offset by increases in our accounts payable and amounts due to related parties of $66,244 and $30,246, and $59,588 in unearned revenue associated with a deposit we received on eBalance distribution contract.
Net cash used in operating activities during the six months ended November 30, 2016, was $403,305. This cash was primarily used to cover our cash operating expenses of $388,386, to increase our current assets by $40,213, which included partial payments we made on manufacturing of our eBalance Pro Wellness devices, and to reduce our accrued liabilities by $29,553. These uses of cash were offset by decrease in our inventory of $797, and by increases in our accounts payable and amounts due to related parties of $12,358 and $30,221, respectively. In addition, we recorded $11,471 in unearned revenue associated with the deposit we received on the eBalance Pro Wellness device, which we received in December 2016.
Non-cash transactions
During the six-month period ended November 30, 2017, our net loss was affected by the following expenses that did not have any impact on cash used in operations:
·
$106,931 in stock-based compensation, of which $89,556 was associated with the fair value of the options to purchase up to 300,000 shares of our common stock we granted to Ms. Silina, our CFO, as compensation for her services; and $17,375 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, our Chief Medical Officer;
·
$522,407 in fair value of option to acquire up to 1,750,000 shares our common stock we issued for consulting services;
·
$8,241 in interest we accrued on the outstanding notes payable. Of this interest, $3,170 was accrued on the notes payable we issued to Mr. Jeffs, a major shareholder;
·
$77,557 in amortization expense we recorded on the equipment we use in our research of the eBalance Technology; and
·
$5,127 in unrealized foreign exchange, which resulted from fluctuations of Canadian dollar and European Euro denominated transactions.
6
During the six-month period ended November 30, 2016, 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.
·
$78,203 in stock-based compensation, of which $66,603 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 former CEO and President;
·
$20,991 in interest we accrued on the outstanding notes payable. Of this interest, $5,549 was accrued on the notes payable we issued to Mr. Jeffs, a major shareholder;
·
$13,730 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; and
·
$36,521 in amortization expense we recorded on the equipment we use in our research of the eBalance Technology.
The above expenses were in part offset by $4,264 decrease in the loss on foreign exchange, which resulted from fluctuations of Canadian dollar and European Euro denominated transactions.
Net Cash Provided by Financing Activities
During the six-month period ended November 30, 2017, we borrowed a total of $19,318 (CAD$25,000) from a major shareholder and $6,000 from an unrelated party. The loans are unsecured, payable on demand and bear interest at 6% per annum, compounded monthly. In addition to the loans, we received $370,000 from subscriptions to the units of our common stock under the Offering, which we closed on October 12, 2017. During the same period we repaid net of $22,704 in non-interest bearing advances with an unrelated party.
On September 15, 2017, we received a notice from Mr. Jeffs that he had assigned the rights to $7,984 due to him under the demand notes payable and $54,516 due to him under the Term Loan to two unaffiliated parties. The assignees notified the Company of their intention to convert the debt acquired by them from Mr. Jeffs into the shares of the Company’s common stock as part of the proposed debt restructuring initiative (the “Debt Restructuring”), which we completed on October 12, 2017.
During the six-month period ended November 30, 2016, we borrowed a total of $75,000 from unrelated parties and $73,754 (CAD$96,500) from a major shareholder. These loans were unsecured, payable on demand and bore 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.
Net Cash Used in Investing Activities
We did not have any investing activities during the six-month period ended November 30, 2017.
During the six-month period ended November 30, 2016, we paid $14,940 for the equipment which is being used in our observational studies.
Going Concern
The notes to our unaudited interim consolidated financial statements at November 30, 2017, disclose our uncertain ability to continue as a going concern. We are a development stage company with limited operations. To date we have been able to generate only minimal revenue from the operations of our former 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 $5,518,708 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.