Item 7. Management’s Discussion and Analysis
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our audited financial statements and the related notes for the years ended January 31, 2016 and January 31, 2015 that appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our 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 discussed below and elsewhere in this annual report, particularly in the section entitled "Risk Factors" beginning on page 20 of this annual report.
Our audited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.
Purchase of Significant Equipment
We do not intend to purchase any significant equipment over the next twelve months.
Personnel Plan
We do not expect any material changes in the number of employees over the next 12 month period (although we may enter into employment or consulting agreements with our officers or directors). We do and will continue to outsource contract employment as needed.
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Results of Operations
For the Years Ending January 31, 2016 and 2015
Year Ended
January 31,
2016
2015
Revenue
$
Nil
$
Nil
Operating expenses
$ 10,321,490
$ 117,484
Accretion of discounts on convertible debentures
$
Nil
$ 8,723
Financing costs
$
Nil
$ 152,754
Gain on change in fair value derivative
$ (14,425 )
$ (188,701 )
Loss on settlement and conversions of debentures
$
Nil
$ 973,856
Interest expense
$
Nil
$ 64,888
Net income (loss)
$ ( 10,307, 065 )
$ (1,129,004 )
Expenses
Our operating expenses for our years ended January 31, 2016 and 2015 are outlined in the table below:
Year Ended
January 31,
2016
2015
Depreciation and amortization
$ 322
$ 409
Consulting
$
Nil
$
Nil
Foreign exchange loss
$ 13,911
$ 52,930
General and administrative
$ 961,746
$ 30,607
Management fees
$ 2,268,297
$ 2,694
Professional fees
$ 340,220
$ 30,844
Research and development
$
Nil
$
Nil
Stock-based compensation
$ 6,736,994
$
Nil
Operating expenses for year ended January 31, 2016 increased by $10,204,006 as compared to the comparative period in 2015 due to increased general and administrative activities such as investor relations and promotions. Professional fees increased primarily due to our acquisition of IndUS. Management fees and stock-based compensation increased as a result of 2,708,333 common stock issued for services and 6,200,000 options to purchase our common stock granted.
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Revenue
We have not earned any revenues since our inception and we do not anticipate earning revenues in the upcoming quarter.
Equity Compensation
Our company has a stock option plan which was adopted and approved by our shareholders on December 30, 2015. During our fiscal year ended January 31, 2016, 6,000,000 stock options with exercise price of $0.10 and maturity on December 14, 2020 were granted to directors and a consultant. As well, 200,000 stock options with exercise price of $0.25 and maturity on November 30, 2020 were granted to members of our Scientific Advisory Board. We currently do not have any other equity compensation plans or arrangements.
Liquidity and Financial Condition
Working Capital
At
January 31,
2016
At
January 31,
2015
Current Assets
$ 103,215
$ 938
Current Liabilities
$ 435,104
$ 55,790
Working Capital (Deficit)
$ (331,889 )
$ (54,852 )
Cash Flows
Year Ended
January 31,
2016
Year Ended
January 31,
2015
Net Cash used in Operating Activities
$ (163,942 )
$ (47,257 )
Net Cash used in Investing Activities
$ Nil
$ Nil
Net Cash Provided by Financing Activities
$ 240,232
$ 47,321
Effects of exchange rate changes on cash
$ (5,490 )
$ (160 )
Increase (Decrease) in Cash During the Period
$ 70,800
$ (96 )
We will require additional funds to fund our budgeted expenses over the next 12 months. These funds may be raised through equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares. There is still no assurance that we will be able to maintain operations at a level sufficient for an investor to obtain a return on his investment in our common stock. Further, we may continue to be unprofitable. We need to raise additional funds in the immediate future in order to proceed with our budgeted expenses.
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Specifically, we estimate our expenses and working capital requirements for the next 12 months to be as follows:
Estimated Expenses
Description
($)
Research and Development Costs:
Studies and manufacture of active product ingredient
4,130,000
IND filing
1,000,000
R&D headcount
1,250,000
Sales and Marketing Costs:
Entertainment and promotion
24,000
Investor relations
60,000
Literature
11,600
Travel
60,000
Operating Expenses:
Director fees
160,000
Insurance
40,000
Office
21,200
Office and laboratory lease
30,000
Professional fees
143,000
Public company expenses
52,500
Salaries and benefits
898,523
Telephone and internet
6,000
Vehicles and transportation
6,000
Total:
8,887,823
Based on our planned expenditures, we will require additional funds of approximately $8.9 million to proceed with our business plan over the next 12 months. If we secure less than the full amount of financing that we require, we will not be able to carry out our complete business plan and we will be forced to proceed with a scaled back business plan based on our available financial resources.
We anticipate that we will incur substantial losses for the foreseeable future. Even if we carry out our planned research and development activities on our products, there is no guarantee that we will be able to market them or derive any revenues from their sale. Currently, we intend to prioritize the allocation of any financing that we may receive toward the development of PVT-005 and PVT-006.
We expect that we may obtain material net cash inflows from our projects 18 to 36 months following the start of our proposed clinical trials, which we expect will begin soon after the necessary funding is obtained. However, there can be no assurance we will obtain such cash inflows.
We intend to raise capital through equity and, if necessary, debt financing. We anticipate that the bulk of any additional funding we receive will be in the form of equity financing from the sale of our common stock. However, we do not have any financing arranged and we cannot provide any assurance that we will be able to raise sufficient funds from the sale of our common stock to fund our operations or planned research and development activities. In the absence of such financing, we will not be able to carry out our planned research and development activities. Even if we are successful in obtaining equity financing to fund our operations and research and development activities, there is no assurance that we will obtain the funding necessary to pursue any advanced research and development following the completion of our planned clinical trials. If we do not continue to obtain additional financing, we may be forced to abandon our business plan.
Any modifications to our plans will be based on many factors, including the results of our clinical trials and the amount of available capital. Further, the extent to which we carry out our development of planned products is dependent upon the amount of financing available to us.
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Future Financings
We will require additional financing in order to enable us to proceed with our plan of operations, as discussed above, including approximately $8.9 million over the next 12 months to pay for research and development and ongoing expenses. These cash requirements are in excess of our current cash and working capital resources. Accordingly, we will require additional financing in order to continue operations and to repay our liabilities. There is no assurance that any party will advance additional funds to us in order to enable us to sustain our plan of operations or to repay our liabilities.
We anticipate continuing to rely on equity sales of our common stock in order to continue to fund our business operations. Issuances of additional shares will result in dilution to our existing stockholders. There is no assurance that we will achieve any additional sales of our equity securities or arrange for debt or other financing to fund our planned business activities.
We presently do not have any arrangements for additional financing for the expansion of our operations, and no potential lines of credit or sources of financing are currently available for the purpose of proceeding with our plan of operations.
Contractual Obligations
As a "smaller reporting company", we are not required to provide tabular disclosure obligations.
Going Concern
We have not generated any revenues and are dependent upon obtaining outside financing to carry out our operations and pursue our pharmaceutical research and development activities. If we are unable to generate future cash flows, raise equity or secure alternative financing, we may not be able to continue our operations and our business plan may fail. You may lose your entire investment.
If our operations and cash flow improve, management believes that we can continue to operate. However, no assurance can be given that management's actions will result in profitable operations or an improvement in our liquidity situation. The threat of our ability to continue as a going concern will cease to exist only when our revenues have reached a level able to sustain our business operations.
Off-Balance Sheet Arrangements
We have no 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 stockholders.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with the accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our financial statements is critical to an understanding of our financial statements.
Use of Estimates
The preparation of these financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our company regularly evaluates estimates and assumptions related to the recoverability of long-lived assets, valuation of convertible debentures, assumptions used to determine the fair value of stock-based compensation and derivative liabilities, and deferred income tax asset valuation allowances. Our company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by our company may differ materially and adversely from our company's estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
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Long-lived Assets
In accordance with ASC 360, "Property, Plant and Equipment", our company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value, which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.
Stock-Based Compensation
Our company records stock-based compensation in accordance with ASC 718, Compensation – Stock-Based Compensation , using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
Derivative Financial Instruments
Derivative financial instruments that are not classified as equity and are not used in hedging relationships are measured at fair value. Subsequent changes to fair value are recorded in the statement of operations.
Income Taxes
Our company accounts for income taxes using the asset and liability method in accordance with ASC 740, "Income Taxes". The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. Our company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. As of January 31, 2016 and 2015, our company did not have any amounts recorded pertaining to uncertain tax positions.
Our company files federal and provincial income tax returns in Canada and federal and state income tax returns in the United States. Our company recognizes interest and penalties related to uncertain tax positions in tax expense. During the years ended January 31, 2016 and 2015, there were no charges for interest or penalties.
Financial Instruments and Fair Value Measures
ASC 820, Fair Value Measurements , requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:
Level 1 - Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 - Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 - Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
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Our company's financial instruments consist principally of cash, amounts receivable, accounts payable and accrued liabilities and due to related parties. Pursuant to ASC 820, the fair value of our cash is determined based on "Level 1" inputs, which consist of quoted prices in active markets for identical assets. We believe that the recorded values of all of our other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.
Foreign Currency Translation
The functional currency of our parent entity, Pivot Pharmaceuticals Inc., is the Canadian dollar and the functional currency of our subsidiary is the US dollar. Our company's presentation currency is the US dollar.
Monetary assets and liabilities are translated using the exchange rate prevailing at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are translated at rates of exchange in effect at the date of the transaction. Expenses are translated at average rates for the period. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income.
Results of operations are translated into our company's presentation currency, US dollars, at an appropriate average rate of exchange during the year. Net assets and liabilities are translated to US dollars for presentation purposes at rates of exchange in effect at the end of the period. Gains or losses arising on translation are recognized in other comprehensive income (loss) as foreign currency translation adjustments.
Recent Accounting Pronouncements
Our company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a "smaller reporting company", we are not required to provide the information required by this Item.