BetterLife Pharma Inc. 10-K

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, 2019 and January 31, 2018 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” of this annual report. Our audited financial statements are stated in Canadian Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles. Purchase of Significant Equipment We expect to incur capital expenditures on our facilities and purchase equipment required for production, upon sufficient financing, in order to pursue our business plans. . Personnel Plan Over the next 12-month period, we expect to increase the number of employees as required in order to pursue our business plans. 17 Table of Contents Results of Operations For the Years Ending January 31, 2019 and 2018 Year Ended January 31, 2019 2018 Revenue $ Nil $ Nil Operating expenses $ 6,844,092 $ 1,354,897 Accretion of discounts on convertible debentures $ 510,758 $ 140,341 (Gain) loss on change in fair value derivative $ Nil $ (265,962 ) Gain on disposal of asset $ Nil $ (913,746 ) Gain on repayment of promissory note $ (8,890 ) $ Nil Gain on settlements of debt $ Nil $ (308,555 ) Interest expense $ 391,250 $ 35,379 Interest income $ (4,196 ) $ Nil Loss on extinguishment of convertible debentures $ 1,378,210 $ Nil Other $ 35,147 $ Nil Deferred tax recovery $ (80,786 ) $ Nil Net loss $ 9,146,371 $ 42,354 For the year ended January 31, 2019, our net loss increased by $8,929,244. During the year ended January 31, 2019, we completed the acquisitions of the Thrudermic Transdermal Nanotechnology and Pivot Naturals, LLC and its RTIC patents and entered into a joint venture to produce and commercialize cannabis-infused beverages. We also performed due diligence on other potential transactions. The result of these activities was an increase to operating expenses. Pursuant to the acquisitions, we entered into employment contracts which increased our salaries and wages expense. Should our company be successful in securing continued financing for the development of our platform technologies, we expect our future expenses to be consistent with our expenses for the year ended January 31, 2019. In addition to the above increased expenses, we settled convertible debentures totaling $1,500,000 through the issuance of 3,750,000 units, with each unit consisting of one common stock and one share purchase warrant, which resulted in a loss on extinguishment of convertible debentures of $1,221,603 being included in other income (expenses). Expenses Our operating expenses for our years ended January 31, 2019 and 2018 are outlined in the table below: Year Ended January 31, 2019 2018 Depreciation and amortization $ 900,651 $ 30,825 Due diligence costs $ 251,674 $ 11,304 Finders’ fee expense $ 100,000 $ Nil Foreign exchange loss $ 24,206 $ 131,909 General and administrative $ 2,372,563 $ 421,246 Licensing fees $ 79,008 $ Nil Professional fees $ 845,983 $ 252,446 Rent $ 294,937 $ 24,352 Research and development $ 430,456 $ 90,826 Sales and marketing $ 9,526 $ Nil Wages and salaries $ 1,526,232 $ 391,989 Write-off of inventory $ 8,856 $ Nil Operating expenses $ 6,844,092 $ 1,354,897 Operating expenses for year ended January 31, 2019 increased by $5,489,195 as compared to the comparative period in 2018. We completed the acquisitions of the Thrudermic Transdermal Nanotechnology and Pivot Naturals, LLC and its RTIC patents, entered into an agreement to access the Solumer™ technology, completed due diligence on other potential transactions and entered into a joint venture to produce and commercialize cannabis-infused beverages. These activities resulted in increased due diligence costs, finders’ fee expense, consulting fees included in general and administrative, license fees and legal fees included in professional fees. Research and development expense increased due to activities we undertook to prepare our products for commercialization. Pursuant to the acquisitions of the Thrudermic Transdermal Nanotechnology and Pivot Naturals, LLC, we entered into employment contracts which increased our salaries and wages expense. Depreciation and amortization increased due to amortization of intangible assets acquired as part of the acquisitions. During fiscal 2019, we secured a manufacturing facility in California, USA and a facility in Quebec, Canada in preparation for commercialization of products, which resulted in rent expense. 18 Table of Contents 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, 2019, 200,000 stock options with exercise price of $1.67 and maturity on March 11, 2023 and 100,000 stock options with exercise price of US$0.32 and maturity on October 28, 2023 were granted. During our fiscal year ended January 31, 2018, 100,000 stock options with exercise price of US$0.39 and maturity on November 14, 2022 were granted. We currently do not have any other equity compensation plans or arrangements. Liquidity and Financial Condition Working Capital At January 31, 2019 At January 31, 2018 Current Assets $ 241,874 $ 183,477 Current Liabilities $ 5,086,227 $ 527,618 Working Capital (Deficit) $ (4,844,352 ) $ (344,141 ) Cash Flows Year Ended January 31, 2019 Year Ended January 31, 2018 Net Cash used in Operating Activities $ (4,977,590 ) $ (561,521 ) Net Cash used in Investing Activities $ (850,510 ) $ Nil Net Cash Provided by Financing Activities $ 5,827,113 $ 457,346 Effects of exchange rate changes on cash $ (3,517 ) $ 36,454 (Decrease) Increase in Cash During the Year $ (4,504 ) $ (67,721 ) 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. 19 Table of Contents Specifically, we estimate our expenses and working capital requirements for the next 12 months to be as follows: Estimated Expenses Product manufacture $ 4,990,000 U.S. facility capital expenditures 2,000,000 Patent maintenance 455,000 Regulatory 250,000 Sales and marketing 400,000 General and administrative 4,155,000 Total: $ 12,250,000 Based on our planned expenditures, we will require additional funds of approximately $12.25 million to proceed with our business plan over the next 12 months and the commencement of commercialization of our product initiatives. 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. Although we are anticipating commercialization to commence on some of our product initiatives over the next 12 months, anticipated revenues may not be initially sufficient to finance our business plan. 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. In the absence of such financing, we will not be able to carry out our planned development activities. There is 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. Any modifications to our plans will be based on many factors, including 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. Future Financings We will require additional financing in order to enable us to proceed with our plan of operations, as discussed above, including approximately $12.25 million over the next 12 months to pay for capital expenditures, product development, sales and marketing and general and administrative 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 are currently completing due diligence on a $15 million private placement and strategic partnership, which would provide financing for the expansion of our operations. There is no guarantee that this financing will close. 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 development and commercialization 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. 20 Table of Contents 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 United States Generally Accepted Accounting Principles. 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. Reporting Currency Effective February 1, 2018, the Company changed its reporting currency from US Dollars to Canadian Dollars as it expects to conduct increasing transactions and financing based on the Canadian Dollars. This will reduce the impact of increased volatility of the US Dollars to Canadian Dollars exchange rate on the Company’s reported operating results. The aligning of the reporting currency with the underlying operations will better depict the Company’s results of operations for each period. The related financial statements prior to February 1, 2018 have been represented to Canadian Dollars as if the financial statements originally had been presented in Canadian Dollars since the earliest periods presented. Use of Estimates The preparation of these consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to the useful life and recoverability of long-lived assets and assumptions used to determine the fair values of stock-based compensation, warrants and warrants issued with shares units. Estimates and assumptions have also been made on the recoverable amount of intangible assets, fair value of debentures for the purpose of evaluating modification versus extinguishments, fair value of convertible debentures and deferred income tax asset. The 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 may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. Foreign Currency Translation The functional currency of the parent entity, Pivot Pharmaceuticals Inc., and the wholly-owned subsidiaries, Pivot Green Stream Health Solutions Inc. and Thrudermic, LLC, is the Canadian dollar. The functional currency of the wholly-owned subsidiary, Pivot Naturals, LLC, is the US dollar. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the rates of exchange in place at the balance sheet date. Transactions in currencies other than the functional currency during the year are converted into the functional currency at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains and losses are recognized in the consolidated statement of operations and comprehensive loss. 21 Table of Contents Assets and liabilities of the companies are translated from their respective functional currencies to the reporting currency at the exchange rates at the balance sheet dates, equity accounts are translated at historical exchange rates and revenues and expenses are translated at the average exchange rates in effect during the reporting period. The resulting foreign currency translation adjustment are recorded in other comprehensive loss. 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. Our financial instruments consist principally of cash, accounts payable and accrued liabilities, due to related parties, convertible debentures, promissory note and acquisition obligation. 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. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations. Equipment Equipment are recorded at cost less accumulated depreciation and accumulated impairment losses. Depreciation is recorded using the straight-line method to depreciate the cost of equipment over its estimated useful life of six years. 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. Intangible Assets Intangible assets consists of costs incurred to acquire license, patents and unpatented technology. Intangible assets are considered finite live assets and recorded at cost less accumulated amortization and accumulated impairment. Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the asset. Amortization is recorded using the straight-line method and is intended to amortize the intangible assets over their estimated useful lives: License 5 years Patents 10 years Unpatented technology 10 years 22 Table of Contents Impairment of Intangible Assets When facts and circumstances indicate that the carrying value of definite-lived intangible assets may not be recoverable, management assesses the recoverability of the carrying value by preparing estimates of sales and the resulting profit and cash flows expected to result from the use of the asset or asset group and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, we recognize an impairment loss. The impairment loss recognized is the amount by which the carrying amount of the asset or asset group exceeds the fair value. We use a variety of valuation methodologies to determine the fair value of these assets, including discounted cash flow models. Stock-Based Compensation The Company records stock-based compensation in accordance with ASC 718, Compensation – Stock-Based Compensation to determine the fair value of share options and account for stock-based compensation expenses using an estimated forfeiture rate at the time of grant and revising the rate, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Stock-based compensation expenses are recorded net of estimated forfeitures such that expenses are recorded only for those share-based awards that are expected to vest. 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. 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, 2019 and 2018, our company did not have any amounts recorded pertaining to uncertain tax positions. Our company files federal and provincial income tax returns in Canada. Our company recognizes interest and penalties related to uncertain tax positions in tax expense. During the years ended January 31, 2019 and 2018, there were no charges for interest or penalties. 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. 23 Table of Contents