ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Forward Looking Statements
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the interim consolidated financial statements, and notes thereto, for the quarter ended May 31, 2018 contained under Item 1 of this Quarterly Report on Form 10-Q (“Form 10-Q”) and in conjunction with the annual consolidated financial statements, and notes thereto, contained in the Annual Report on Form 10-K for the fiscal year ended November 30, 2017 (“Form 10-K”). Unless otherwise indicated herein, the discussion and analysis contained in this MD&A includes information available to July 16, 2018.
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Certain statements contained in this MD&A may constitute forward-looking statements as defined under securities laws. Forward-looking statements may relate to our future outlook and anticipated events or results and may include statements regarding our future financial position, business strategy, budgets, litigation, projected costs, capital expenditures, financial results, taxes, plans and objectives. In some cases, forward-looking statements can be identified by terms such as “anticipate”, “estimate”, “intend”, “project”, “potential”, “continue”, “believe”, “expect”, “could”, “would”, “should”, “might”, “plan”, “will”, “may”, “predict”, the negatives of such terms, and other similar expressions concerning matters that are not historical facts. To the extent any forward-looking statements contain future-oriented financial information or financial outlooks, such information is being provided to enable a reader to assess our financial condition, material changes in our financial condition, our results of operations, and our liquidity and capital resources. Readers are cautioned that this information may not be appropriate for any other purpose, including investment decisions.
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Forward-looking statements contained in this MD&A are based on certain factors and assumptions regarding expected growth, results of operations, performance, and business prospects and opportunities. While we consider these assumptions to be reasonable, based on information currently available, they may prove to be incorrect. Forward-looking statements are also subject to certain factors, including risks and uncertainties that could cause actual results to differ materially from what we currently expect. These factors are more fully described in the “Risk Factors” section at Item 1A of the Form 10-K.
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Forward-looking statements contained in this commentary are based on our current estimates, expectations and projections, which we believe are reasonable as of the date of this report. You should not place undue importance on forward-looking statements and should not rely upon this information as of any other date. Other than as required under securities laws, we do not undertake to update any forward-looking information at any particular time.
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All dollar amounts in this MD&A are expressed in thousands of U.S. dollars unless otherwise noted.
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Business Developments
On December 6, 2017 Mr. Michael Browne resigned as Chief Financial Officer and Treasurer of the Company. Mr. Browne’s resignation did not result from any disagreement with the Company regarding our operations, policies, practices, or otherwise. In light of the resignation, Mark Holcombe, our President and Director, was appointed to serve as Chief Financial Officer.
On December 1, 2017 our Board of Directors appointed Mr. Brian Rola as Vice-President of Trident and General Manager of our wholly owned subsidiary, Trident Sports Nutrition Inc., and Mr. Nick Pili as Vice-President of Trident and General Manager of our wholly owned subsidiary, Brain Armor Inc.
During fiscal 2016 and 2017, Trident advanced approximately $478,539 and $886,999, respectively, in working capital loans with an interest rate of 6% per annum to its 85% owned and controlled subsidiary, Brain Armor Inc. As at December 1st 2017 Brain Armor owed an aggregate of approximately $1,394,251 to the Company in respect of the advances. On December 1, 2017, the boards of directors of Trident and Brain Armor approved the settlement of the inter-company debt by the issuance to Trident of 1,859,001 common shares of Brain Armor at the price of $0.75 per share. As a result of the settlement, Trident now owns approximately 94.82% of Brain Armor’s issued and outstanding securities.
On December 6, 2017, our Board of Directors authorized the issuance to its members and management stock options to purchase up to 2,615,000 share of our common stock. 1,307,500 of the options vest upon issuance and are exercisable for up to five years at $0.85 per share, while the remaining 1,307,500 will vest 12 months following issuance and be exercisable for up to five years at $1.00 per share. The Options were issued pursuant to the Company’s 2013 Stock Option Plan, which was registered with the Securities and Exchange Commission on Form S-8 in January, 2015. The 2013 Stock Option Plan authorizes Trident to issue incentive and non-qualified stock options to employees and consultants of the Company to purchase a number of shares not to exceed 15% of the Company’s currently issued and outstanding securities.
Also on December 6, 2017, the Board of Directors authorized the issuance of 250,000 stock options to Sanitas, LLC, a consultant and founding shareholder of Brain Armor. The options vest immediately and are exercisable for a period of five (5) years to purchase common shares of Brain armor at $0.75 per share. The options were issued to one US person, relying on Rule 506 under Regulation D and/or Section 4(2) of the Securities Act of 1933.
Effective December 22, 2017, Trident exercised its option under our Exclusive License Agreement (dated March 1, 2015) to purchase the Brain Armor® brand from DSM Nutrition Products LLC. Subsequently, the parties have executed applicable trademark assignment and purchase agreements necessary to transfer all global intellectual property rights in the Brain Armor brand to Trident.
Effective December 31, 2017, Trident exercised an option to terminate the Trademark License Agreement with Everlast World’s Boxing Headquarters Corp. and International Brand Management Limited (IBML). This strategic decision will allow Trident to focus resources on higher-potential portfolio opportunities. Subsequently, both parties have actively engaged to explore alternative frameworks that may or may not leverage Everlast® brand equity in the sports and active nutrition category.
In December 2017, Trident began shipping P2N Peak Performance Nutrition products on an exclusive basis under a Vendor Agreement with Amazon Fulfillment Services Inc.
On June 13, 2018, Trident was accepted into the Wal-Mart Supplier finance program with Wells Fargo Bank. The program offers receivables discounting to cost-effectively accelerate the collection of Accounts Receivable with the benefit of improved cash flow with early payment.
Results of Operations
The following summary of our results of operations should be read in conjunction with our unaudited consolidated financial statements for the three and six month periods ended May 31, 2018 and May 31, 2017.
Our operating results for three month periods ended May 31, 2018 and May 31, 2017 are summarized as follows:
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Three Months
Ended
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Three Months
Ended
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May 31, 2018
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May 31, 2017
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Revenues
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$
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1,630,933
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$
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11,302
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Gross Profit
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$
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113,621
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$
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5,391
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Operating Expenses
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$
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1,028,030
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$
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740,474
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Other Expenses
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$
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501,790
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$
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304,958
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Net Loss
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$
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1,416,199
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$
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1,040,041
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Add back:
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Interest Expense
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$
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520,178
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$
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304,958
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Depreciation
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$
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2,096
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$
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0
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Amortization
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$
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12,125
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$
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75,000
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EBITDA
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$
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(881,800
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)
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$
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(660,083
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)
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Revenues and Gross Profits
Sales in the second quarter of 2018 increased to $1,630,933 versus $11,302 in the prior year primarily driven-by private label sports nutrition product sales associated with an established vendor agreement. Gross profit increased to $113,621 or 7.0% of revenues versus $5,391 or 47.7% of revenues in the prior year. We expect product sales and profit contribution to improve significantly over the course of 2018 as commercial efforts gain traction, private label and control label distribution expansion is realized and branded product innovation enters the market.
Operating Expenses
Our operating expenses for the three month periods ended May 31, 2018 and May 31, 2017 are summarized below:
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Three Months
Ended
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Three Months
Ended
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May 31, 2018
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May 31, 2017
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Professional Fees
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$
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83,637
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$
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44,446
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General & Administrative Expenses
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$
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739,461
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$
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394,692
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Marketing, Selling & Warehousing Expenses
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$
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97,448
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$
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170,498
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Management Salary
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$
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25,500
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$
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21,000
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Director's Fees
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$
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22,500
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$
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21,000
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Rent
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$
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59,484
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$
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2,588
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Royalty
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$
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0
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$
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86,250
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Operating expenses for the three month period ended May 31, 2018 were $1,028,030 as compared to $740,474 for the comparative period in 2017, an increase of 38.8%. The increase in our operating expenses was primarily due to increased general and administrative costs which included an increase in options expense of $127,712, as well as marketing and promotional expenses as we build out our organization and roll-out our product offering. These costs are expected to continue to increase throughout 2018 as we continue to develop and commercialize our product offerings.
Other Expenses
Other expenses for the three month period ended May 31, 2018 increased to $501,790 versus $304,958 in the comparative period in 2017. The increase was due to an increase in interest expense due to higher debt levels and the impact of certain other items including the beneficial conversion feature related to the convertible note entered into in 2016.
EBITDA
Reported net loss for the three month period May 31, 2018 was $1,416,199 compared to $1,040,041 in the comparative period in 2017. After deducting interest, depreciation and amortization, EBITDA for the three month period ended May 31, 2018 was ($881,800) compared to ($660,083) in 2017. EBITDA included a non-cash option expense of $136,088 for the three month period May 31, 2018 compared to $8,376 in 2017.
Six Month Periods Ended May 31, 2018 and May 31, 2017
Our operating results for six month periods ended May 31, 2018 and May 31, 2017 are summarized as follows:
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Six Months
Ended
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Six Months
Ended
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May 31, 2018
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May 31, 2017
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Revenues
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$
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3,492,633
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$
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27,989
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Gross Profit
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$
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170,526
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$
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12,873
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Operating Expenses
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$
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2,672,171
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$
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1,466,673
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Other Expenses
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$
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965,378
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$
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558,690
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Net Loss
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$
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3,467,023
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$
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2,012,490
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Add back:
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Interest Expense
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$
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999,128
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$
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558,690
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Depreciation
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$
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4,191
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$
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0
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Amortization
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$
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24,250
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$
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150,000
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EBITDA
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$
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(2,439,454
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)
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$
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(1,303,800
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)
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Revenues and Gross Profits
Sales for the first half of 2018 increased to $3,492,633 versus $27,989 in 2017 primarily driven-by private label sports nutrition product sales associated with an established vendor agreement. Gross profit increased to $170,526 or 4.9% of revenues versus $12,873 or 46.0% of revenues in the prior year. We expect product sales and profit contribution to improve significantly over the course of 2018 as commercial efforts gain traction, private label and control label distribution expansion is realized and branded product innovation enters the market.
Operating Expenses
Our operating expenses for the six month periods ended May 31, 2018 and May 31, 2017 are summarized below:
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Six Months
Ended
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Six Months
Ended
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May 31, 2018
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May 31, 2017
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|
|
|
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|
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Professional Fees
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$
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122,160
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$
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92,178
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General & Administrative Expenses
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$
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2,156,726
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$
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820,206
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Marketing, Selling & Warehousing Expenses
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$
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205,794
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$
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295,277
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Management Salary
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$
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51,500
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$
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42,000
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Director's Fees
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$
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45,000
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$
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42,000
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Rent
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$
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62,241
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$
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4,595
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Royalty
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$
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28,750
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$
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170,417
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Operating expenses for the six month period ended May 31, 2018 were $2,672,171 as compared to $1,466,673 for the comparative period in 2017, an increase of 82.2%. The increase in our operating expenses was primarily due to increased general and administrative costs which included an increase in options expense of $899,867, as well as marketing and promotional expenses as we build out our organization and roll-out our product offering. These costs are expected to continue to increase throughout 2018 as we continue to develop and commercialize our product offerings.
Other Expenses
Other expenses for the six month period ended May 31, 2018 increased to $965,378 versus $558,690 in the comparative period in 2017. The increase was due to an increase in interest expense due to higher debt levels and the impact of certain other items including the beneficial conversion feature related to the convertible note entered into in 2016.
EBITDA
Reported net loss for the six month period May 31, 2018 was $3,467,023 compared to $2,012,490 in the comparative period in 2017. After deducting interest, depreciation and amortization, EBITDA for the six month period ended May 31, 2018 was ($2,439,454) compared to ($1,303,800) in 2017. EBITDA included a non-cash option expense of $924,078 for the six month period May 31, 2018 compared to $24,211 in 2017.
Balance Sheet Data
The following table provides selected balance sheets data as at May 31, 2018 and May 31, 2017.
Balance Sheet Data:
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May 31, 2018
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May 31, 2017
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Cash and cash equivalents
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$
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2,030,507
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$
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3,143,788
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Total assets
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$
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6,099,556
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$
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5,714,774
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Total liabilities
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$
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14,116,296
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$
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11,688,569
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Stockholders' (deficit)
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$
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(8,016,740
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)
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$
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(5,973,795
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)
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During the second quarter of 2018 total assets increased as a result of an increase in intangible assets and inventory.
Strategic Orientation
Our objective is to provide our shareholders with solid returns through strategic investments across multiple consumer product and ingredient platforms. The platforms we are focusing on include:
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Life science technologies and related products that have applications to a range of consumer products;
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Nutritional supplements and related consumer goods providing defined benefits to the consumer; and
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·
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Functional foods and beverages ingredients with defined health and wellness benefits.
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We are building our business through strategic investments in high growth early stage consumer brands and functional ingredient platforms within segment/sectors which we believe offer sustainable commercial potential. We are focused on three core strategies underpinning our objectives:
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To execute a multi-tier brand, supply-chain and innovation strategy to drive revenue;
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·
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To aggressively manage an asset light business model to drive our low cost platform; and
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To drive disciplines leading to increased investor awareness and ability to finance and govern growing operations.
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While we have yet to achieve profitability, we are making significant progress against our commercial objectives. We expect revenue and margin to increase as we continue to strengthen distribution partnerships while capitalizing on product innovation, supply-chain optimization and brand equity within our current portfolio.
Liquidity and Capital Resources
Our cash balance at May 31, 2018 was $2,030,507. Management believes the current funds available to the company will be sufficient to fund our operations for the next twelve months.
On January 29, 2015, we entered into a securities purchase agreement with a non-US institutional investor whereby we agreed to sell an aggregate principal amount of $2,300,000 of senior secured convertible debentures, convertible into shares of the company’s common stock. We received $1,800,000 of the funds from the transaction on February 5, 2015 and the balance of $500,000 on May 14, 2015. On September 26, 2016, we entered into a Convertible Promissory Note Amendment Agreement with this investor whereby we agreed to extend the maturity date and amend the interest payable on the senior secured convertible debentures, whereby we extended the term of the notes through September 30, 2019 and interest rate was increased from 6% per annum to 8% per annum. The convertible debentures are convertible into shares of the Company’s common stock at an initial conversion price of $.71 per share for an aggregate of up to 3,239,437 shares.
On September 26, 2016, we entered into a Securities Purchase Agreement with a non-US institutional investor pursuant to which, in consideration for proceeds of $4,100,000, we issued a secured convertible promissory note in the amount of $4,100,000. Pursuant to the Securities Purchase Agreement, the investor has agreed, from time to time after January 1, 2017, to make additional investments at our request of up to $5,900,000 ($10,000,000 in the aggregate) in one or more tranches of not less than one tranche during any 60 day period. The funding of any tranche under the agreement (other than the first $4,100,000 which has been funded) is subject to the mutual agreement of the parties as to the use of funds. The parties have agreed to negotiate in good faith to pre-approve use of funds within 120 days following September 26, 2016. On May 9, 2017, the Company received the second tranche of funding with proceeds of $4,400,000 and on May 16, 2018 the third tranche of funding with proceeds of $1,500,000 for a total investment by the investor of $10,000,000. The Company intends to use the proceeds of the secured convertible note for general working capital purposes including, settlement of accounts payable and repayment of mature loans. In consideration of each advance made by the investor pursuant to the Securities Purchase Agreement, we will issue to the investor a convertible promissory note of equal value, maturing three years after issuance, and bearing interest at the rate of 8% per annum. Each note will be secured in first priority against the present and after acquired assets of the Company, and will be convertible in whole or in part at the option of the holder into common shares of the Company at a conversion price per share of $0.60, equal to a 25% discount to the 10 day average closing price of the Company’s common stock for the period immediately preceding the issuance of the applicable note. Due to the note being convertible to the Company common shares, a beneficial conversion feature analysis was performed. The intrinsic value of the conversion feature was $3,333,334 and was recognized as debt discount. As of May 31, 2018, $1,425,423 of debt discount was amortized to interest of which $546,684 was amortized during the current six month period and $878,740 in prior years. The unamortized discount as of May 31, 2018 is $1,907,910.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.