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Ovation Science Inc. — Management Reports 2020
Apr 30, 2020
47628_rns_2020-04-29_4c676b24-2491-499a-8a84-710359bfcfdc.pdf
Management Reports
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OVATION SCIENCE INC.
Management Discussion & Analysis For the years ended December 31, 2019 and 2018
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following Management Discussion and Analysis (“MD&A”) has been prepared by management, in accordance with the requirements of National Instrument 51-102 as of April 29, 2020 and should be read in conjunction with the audited financial statements for the year ended December 31, 2019, and the related notes contained therein which have been prepared under International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
All financial information in this MD&A has been prepared in accordance with IFRS and all dollar amounts are quoted in Canadian dollars, the reporting and functional currency of Ovation Science Inc. (the “Company”), unless specifically noted.
FORWARD-LOOKING STATEMENTS
This MD&A contains certain forward-looking statements and information relating to the Company that are based on the beliefs of its management as well as assumptions made by and information currently available to the Company. When used in this document, the words “anticipate”, “believe”, “estimate”, “expect” and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. This MD&A contains forward-looking statements relating to, among other things, regulatory compliance, the sufficiency of current working capital, the estimated cost and availability of funding for the Company’s operations. Such statements reflect the current views of management with respect to future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause the actual results, performance or its achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. See also “Cautionary Statement Regarding Forward-Looking Information”.
DESCRIPTION OF BUSINESS
The Company was incorporated under the Business Corporations Act of British Columbia on July 18, 2017. The Company was established to take advantage of a new business opportunity to use patented Invisicare® technology in the production of skin products containing derivatives of cannabis, including THC, cannabinoids and hemp oil. Under the terms of the Invisicare Agreement described in detail below, the Company holds the exclusive world wide right to manufacture, distribute, sell, market, sub-license and promote products formulated with Invisicare®, containing cannabis products including cannabinoids, hemp seed and synthetic derivatives of cannabis.
Invisicare® is a patented polymer-based technology for topical and transdermal skin care products. The advantages of products using Invisicare® are enhancement of drug delivery to the skin by delivering greater amounts and enhancing cannabinoid penetration to enter the blood stream as required. The technology also forms a protective bond that holds ingredients on skin resisting rub-off and wash off, is non-occlusive and allows for normal skin respiration and perspiration and the formulations do not contain alcohol, parabens, waxes or other organic solvents.
The Company’s business model is to sublicense Invisicare® enhanced product formulations to licensed businesses engaged in the production of cannabis or hemp products for approved markets and/or geographic areas. At June 30, 2018, the Company had two sublicensees, Canopy, which holds the exclusive sublicense for certain cannabis-based products in Canada. The Company’s second sublicensee is Lighthouse, which holds the exclusive license for the United States for licensed dispensaries and non-exclusive outside of dispensaries in the United States. Canopy also has certain rights of first refusal to license products for other worldwide markets. On April 16, 2019, the Company announced that it and Canopy had mutually elected to terminate their license agreement, eliminating any restrictions preventing the Company from dealing with other licensed producers in Canada and terminating the right of first refusal held by Canopy.
Under the Company’s business model, it earns revenue from a number of sources including, licensing fees, product development fees, product royalties, and polymer sales to its sublicensees.
Since incorporation on July 18, 2017, the Company’s activities have focused on developing product lines and entering sublicensing agreements, including the Canopy License Agreement and the Lighthouse License Agreement. The
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Company intends to continue sublicensing with other government licensed companies engaged in the sale of cannabinoid and/or hemp oil containing products worldwide.
The Company develops skin care lines containing hemp seed oil and cannabis, and licenses rights to hemp seed oil and cannabis products. The Company has the exclusive world-wide rights to all hemp seed oil and cannabis products (hemp and marijuana) developed with Invisicare®, which enhances the delivery of drugs and other ingredients to and through the skin. The Company, through the Invisicare® Agreement has the right to use Invisicare®, a skin delivery technology covered by patents in eleven (11) countries including the USA and Canada. The Company has developed topical and transdermal creams and lotions made with CBD, THC and combinations thereof plus hemp seed oil. All formulations are formulated with Invisicare® and go through a rigorous pharmaceutical testing process to ensure the formulations are validated throughout the process. The Company does not handle product formulas containing marijuana and the production and testing of marijuana containing products is done at the licensed premises of its sublicensees. As previously discussed, the Company’s business model is also to sublicense the Invisicare® enhanced products to licensed businesses engaged in the production of cannabis or hemp products for certain markets and/or geographic areas.
In April 2019, the Company announced it will be launching its own hemp-derived CBD anti-aging skin care line called ARLO CBD Beauty. ARLO CBD Beauty will initially launch with four products with line extensions planned for later in the year. This announcement was followed by the results of Ovation’s sunscreen testing. Ovation’s CBD SPF 30 sunscreen passed independent testing for highest claims available: broad-spectrum and 80 minute water-resistance. This product will be added to the ARLO CBD Beauty product line.
To support the Company’s continued efforts to develop science-based products, the Company entered into an exclusive agreement with Skincareguide.com Ltd., a leading international peer-reviewed publisher and an authoritative source of dermatology information for physicians and consumers since 2001, to act as the Company’s Medical Dermatology Advisory Board for cannabis formulated products. The objective of the Medical Dermatology Advisory Board is to provide guidance, along with clinical, scientific, research and strategic advice to the Company as it continues to advance its topical and transdermal cannabis product development.
On May 22, 2019 the Company announced the completion of its second cannabidiol (“CBD”) product line Invibe MD. Invibe MD is a “health and wellness” product line infused with hemp-derived CBD and delivered by Ovation’s patented skin delivery technology.
On February 13, 2020 the Company announced that it has entered into an extendable three-year, exclusive world-wide licensing agreement with Skinvisible Pharmaceuticals, Inc. to manufacture, market and sell its DermSafe® hand sanitizer.
It is the first non-cannabis product distributed by Ovation Science Inc., DermSafe is proven to kill a host of bacteria and viruses, including envelope viruses and it provides an extra level of continued protection since it remains bound to the skin for up to four hours, resisting both wash-off and rub off.
Hemp and CBD regulatory environment in the United States
The Company is directly involved in the Industrial Hemp, hemp oil, and CBD marketplace in the State of Nevada and other states which have regulated such activity.
All Industrial Hemp produced and sold by the Company constitutes Industrial Hemp under the 2018 and 2014 Farm Bills, as well as the laws of the states in which it produces and sells such Industrial Hemp and its Products.
The Products will be legal as a matter of federal law because they will constitute hemp as defined in the Agriculture Improvement Act of 2018 (“ 2018 Farm Bill ”). As a result, the Products may be legally shipped and transported in interstate commerce as a matter of federal law. The Products will be legal as a matter of the laws of Nevada for the same reason and may be legally offered for retail sale in Nevada.
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It is noted, however, that topical products containing CBD fall within the regulatory jurisdiction of the U.S. Food and Drug Administration (“ FDA ”) under the federal Food, Drug, and Cosmetic Act (21 U.S.C. 301 et seq.) (“ Food and Drug Act ”). Accordingly, because they will contain CBD, certain of the Products, including the Company’s body care Products, may be subject to enhanced scrutiny or enforcement action by FDA.
2018 Farm Bill
On December 20, 2018 the 2018 Farm Bill became law in the United States. Under the 2018 Farm Bill, industrial and commercial hemp will no longer be classified as a Schedule I controlled substance in the United States. Under the 2018 Farm Bill, hemp includes the plant Cannabis sativa L. and any part of that plant, including seeds, derivatives, extracts, cannabinoids and isomers. To qualify under the 2018 Farm Bill, hemp must contain no more than 0.3 percent of delta-9-tetrahydrocannabinol (THC). Moving forward, the 2018 Farm Bill forever deems hemp an agricultural commodity. As such, federal law enforcement and regulatory officials can no longer mistake hemp for its illicit cousin, marijuana, also a subspecies of the cannabis plant.
The 2018 Farm Bill explicitly allows interstate commerce of hemp which will enable the transportation and shipment of hemp. Ovation expects the removal of hemp as a controlled substance will positively impact the public perception of hemp and sales of its topical and transdermal products containing CBD should increase. In addition, Ovation expects that now that industrial and commercial hemp is federally authorized, the barriers to national distribution have been eliminated and therefore the trend should be product sales expanding nationally in the United States for Ovation and its licensees.
Accordingly, the Drug Enforcement Administration (“DEA”) no longer has any possible claim to interfere with interstate commerce involving hemp products. This should give comfort to federally-regulated institutions -- pharmacies, banks, merchant services, credit card companies, e-commerce sites, and advertising platforms -- as well as private retailers, to conduct commerce involving hemp and the hemp product industry.
The U.S. Food & Drug Administration (“FDA”) retains exclusive jurisdiction over the regulation of ingestible and topical hemp-derived products, as the 2018 Farm Bill does not amend or modify the Food and Drug Act, section 351 of the Public Health Service Act (42 U.S.C. 301 et seq.), or certain authorities of the Commissioner of Food and Drugs or Secretary of the U.S. Department of Health and Human Services.
The 2018 Farm Bill does not, however, pre-empt state or local law. As such, through their regulatory plans, states or tribes may impose separate (and greater) restrictions or requirements on hemp production in their jurisdiction.
Prior to enactment of the 2018 Farm Bill, the Agricultural Act of 2014 (“ 2014 Farm Bill ”) regulated the production of hemp at the federal level. Under this regime, states -- through their departments of agriculture -- were authorized to establish agricultural pilot programs for the production of hemp for research purposes, including marketing studies. The 2014 Farm Bill sanctioned, but did not require, states to establish agricultural pilot programs for the growth and cultivation of hemp for research purposes. At least forty-one (41) states, including Nevada, established agricultural pilot programs under the 2014 Farm Bill, some of them with broader permissions (and more sophisticated regulatory frameworks) than others.
The Company’s objective is to capitalize on the opportunities presented as a result of the changing regulatory environment governing the industrial hemp, hemp oil and cannabis industry in the State of Nevada and, if permitted, other states in the U.S. Accordingly, there are a number of significant risks associated with the business of the Company. If the FDA takes a position regulating all CBD products intended for human or pet consumption there is a risk that federal authorities may enforce this position, and some or all of the products produced by the business of the Company may be deemed unfit for consumption.
For these reasons, the Company’s operations in the U.S. cannabis market may subject the Company to heightened scrutiny by regulators, stock exchanges, clearing agencies and other Canadian authorities.
There can be no assurance that third party service providers, including, but not limited to, suppliers, contractors and banks will not suspend or withdraw services which could negatively impact the business of the Company.
State Law
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The Products will also be legal as a matter of Nevada law. The Products will derive from hemp lawfully grown and cultivated as part of IHRP and do not contain more than three tenths of one percent (0.3%) THC. Further, the Products will be protected as hemp products and hemp-derived CBD products under Nevada law. As such, they will be removed from scheduled control as marijuana and may be legally distributed and sold as a matter of Nevada law.
Health Canada
On December 22, 2018, Health Canada published in the Canada Gazette, Part I, draft regulations for edible cannabis, cannabis extracts and cannabis topicals. These regulations cover the production and sale of cannabis topicals and permitting their legal sale by October 17, 2019.
This is positive news for Ovation as following legalization of topical CBD and THC products, Ovation can expand its business into Canada.
Cannabis Industry
The Company indirectly derives a portion of its revenues from the cannabis industry in certain U.S. states, which industry is illegal under U.S. federal law. The Company is indirectly involved in the cannabis industry in the United States where local state law permits such activities.
Although certain states and territories of the U.S. authorize medical or recreational cannabis production and distribution by licensed or registered entities, under U.S. federal law, the possession, use, cultivation, and transfer of cannabis is illegal and any such acts are criminal acts under federal law under any and all circumstances under the U.S. Federal Controlled Substances Act. The Company’s sublicensees have assured that they are in compliance with state licensing and regulatory frameworks.
Almost half of U.S. states have enacted legislation to regulate the sale and use of medical cannabis without limits on THC (as defined herein) while other states have regulated the sale and use of medical cannabis with strict limits on the levels of THC. Notwithstanding the permissive regulatory environment of medical cannabis at the state level, cannabis continues to be categorized as a Schedule II controlled substance under the CSA in the United States and as such, is illegal under federal law in the United States.
As a result of the conflicting views between state legislatures and the federal government regarding cannabis, investments in cannabis businesses in the United States are subject to inconsistent legislation and regulation. Unless and until the United States Congress amends the CSA with respect to cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a significant risk that federal authorities may enforce current federal law, which may adversely affect the current and future investments of the Company in the United States. As such, there are a number of risks associated with the Company’s existing and future investments in the United States, and such investments may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. There can be no assurance that this heightened scrutiny will not in lead to the imposition of certain restrictions on the Company’s ability to invest in the United States or any other jurisdiction. See “Risk Factors”.
There can be no assurance that third party service providers, including, but not limited to, suppliers, subcontractors and banks will not suspend or withdraw services which could negatively impact the business of the Company.
Recreation transdermal creams
On February 19, 2019, the Company announced the creation of a new product category for the cannabis market: recreational transdermal creams. This first-to-market recreational cannabis product has been formulated to quickly deliver a high-dose of THC into the blood stream (transdermal).
This new product is marketed and distributed in the USA by Cannabiniers under the name BASKiN GLOW. BASKiN GLOW contains 500 milligrams of THC and 50 milligrams of CBD in each 59 ml jar. This product will be a gamechanger in the cannabis industry and the Company is the leader in this new category.
The recreational transdermal cream has been developed using Ovation's drug delivery technology and has the following unique distinctions; Proprietary polymer delivery system delivers high-dose THC to the blood stream;
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bypassing first-pass through the liver; Patent-protection means no other cream can deliver like Ovation's; The unique formula delivers THC transdermally without the use of a patch; it's invisible; significant demand has been established with multiple pre-orders; Third-party testing verifies potency of each product; available in Nevada dispensaries and coming soon to California and other states where legalized.
With over twenty years of topical drug delivery experience, Ovation's management and science team has created a unique pipeline of over twenty-five topical and transdermal cannabis products including CBD, THC and combination products along with a line of anti-aging / beauty products made with CBD.
On May 21, 2019 the Company completed the development of its second cannabidiol (“CBD”) infused product line focused on health and wellness Invibe MD. The product line is infused with hemp-derived CBD and is delivered by Ovation's patented skin delivery technology. This new product line follows the Company's anti-aging skincare product line ARLO CBD Beauty.
Invibe MD will begin with three products: Troubled Skin, Keep Fit Sports Relief and R&R (Rest & Relaxation). Our product line has additional products that have completed development and will be launched at a later time.
Invibe MD:
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Our Invibe MD wellness creams have been developed using Invisicare® drug delivery technology; a technology with over twenty years of research and development in the pharmaceutical industry; specifically dermatology and is patented in eleven countries;
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The Invibe MD products are enhanced with hemp-derived CBD to provide the maximum effect; CBD has many benefits when used topically and without the potential side-effects of smoking, vaping or edibles; CBD is non-psychoactive and does not contain THC so it does not get you high;
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All Ovation products are thoroughly tested to ensure product stability and to validate that they deliver the stated amount of high quality CBD.
There are many benefits to using a topically applied CBD product compared to other methods of delivery. Using products like ARLO CBD Beauty or Invibe MD allows the user to apply the cream or lotion directly on the area affected. The CBD is absorbed into the skin and since it does not have to be digested like oils or edibles, the products work quickly and effectively, focusing right on the area where it is needed.
Statements have not been evaluated by the Food and Drug Administration. These products are not intended to diagnose, treat, cure, or prevent any disease.
On June 25, 2019 the Company announced that its product under license in the USA, remains the #1 topical cannabis product sold in Nevada dispensaries. According to Headset data, a cannabis analytics company that provides key business intelligence to the cannabis industry, Ovation Science's transdermal CBD (cannabidiol) formulation under license again is ranked the #1 selling topical in Nevada during April, May and June by number of units sold according to their latest update. For more information, visit: https://www.headset.io
Ovation's patented skin delivery technology, Invisicare®, is the backbone of all products developed by Ovation Science. It provides exceptional topical and transdermal delivery of CBD and THC to and through the skin; greater than other products on the market according to the Company's research studies.
The continued #1 ranking of our product in Nevada will be a catalyst to expansion into other states by our licensee. This will add immediate royalty revenue and shareholder value as our products will have the opportunity to be offered in significantly more dispensaries than before.
The company also have interest from potential licensees outside of the USA including Canada and Europe and these opportunities would give Ovation's products the opportunity for global expansion. Ovation products are unique from other infused product companies as the Company leverages its expertise in the pharmaceutical industry to develop highly effective, patent-protected products that have the results to prove it.
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Ovation products are used for improved wellness, pain management and even anti-aging, to name a few. Ovation earns revenues from licensing and development fees, royalties and the sale of Invisicare to its licensees. In addition, the Company will be launching its new line of CBD Beauty products in July in the US both in the retail market and online. Statements have not been evaluated by the Food and Drug Administration. These products are not intended to diagnose, treat, cure, or prevent any disease.
On September 23, 2019 the Company announced that it has launched its e-commerce website www.ArloCBDBeauty.com featuring its anti-aging beauty line ARLO CBD Beauty. The website is designed for US consumers who want to purchase high quality anti-aging products infused with the benefits of CBD.
ARLO CBD Beauty products showcase Ovation's commitment to be a leader in the CBD skin care space and to elevate the standards surrounding the quality and efficacy of topical CBD products available to consumers. The website will serve as a platform to highlight Ovation Science's dedication to the following high standards:
High Quality CBD : Ovation uses only high quality, non-psychoactive CBD (cannabinoid), derived from US grown industrial hemp (with less than .03% THC) so our products are non-psychoactive;
Effective Products Backed By Science: Ovation is dedicated to bring only highly effective products to the market with ingredients that work synergistically to bring you the best possible results.
We Stand Behind Our Products: Customer satisfaction is guaranteed or your money; Ovation continues to increase shareholder value by seeking expanded patent protection for its products as well as developing new unique, effective products that can be brought to the market in the US, Canada and globally. Ovation also persists in its negotiations with potential global partners for possible licensing opportunities and joint ventures.
COVID-19
In March 2020, the World Health Organization declared the recent outbreak of coronavirus, also known as “COVID19”, a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, has adversely affected workforces, economies, and financial markets globally, potentially leading to an economic downturn. The impact on the Company is not currently determinable but management continues to monitor the situation.
For Ovation, COVID-19 has had both positive and negative effects on the business.
The Company’s DermSafe product, which works against SAR's (a coronavirus) has been in incredibly high demand, whereby demand has outstripped the Company’s ability to provide. Materials like the bottles, caps, ingredients are harder to get because of the worldwide demand arising from COVID-19. There is also strong competition for these items as many traditional alcohol hand sanitizers use the same things.
Due to the mandatory closure of non-essential retail stores and dispensaries and the subsequent decrease in sales in the cannabinoid market, the Company has seen a decrease in sales of the Lighthouse products that are sold to cannabinoids producers.
The offset of DermSafe sales has more than made up for where the sales to cannabinoids producers have decreased and the Company will report further in its quarter one 2020 results.
OVERALL PERFORMANCE
For the year ended December 31, 2019:
As at December 31, 2019, the Company had $378,759 (December 31, 2018 - $468,969) in cash. For the year ended December 31, 2019, the Company generated revenue of $302,382 (2018 - $96,408) and a gross profit of $283,934 (2018 - $82,491).
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Working capital decreased as at December 31, 2019 to $842,122 from $1,582,627 for the year ended December 31, 2018. Working capital decreased as a result of the Company’s redemption of its GIC of $1,500,000 and a decreased amount of cash from its increased operating losses during the year.
Revenue and gross margin
Revenues and gross margins for the year ended December 31, 2019 were $302,382 and $283,934 respectively (2018 - $96,408 and $82,491, respectively). The Company primarily derived its revenue from its relationship with Lighthouse Strategies, LLC which commenced on April 2018.
Operating expenses
Operating expenses for the year ended December 31, 2019 were $1,151,863 (2018 - $495,205). The increase primarily relates to an increase in management and director fees, increase in advertising and promotion, increases in professional fees, increase in product development expenses and increase in share-based payments.
The increase in management and director fees relates to growth of the Company and increase time and attention required by members of management. The increase in advertising and promotion expense is due to the Company’s growing operations. The increase in professional fees relates to legal, accounting and consulting fees incurred. The increase in product development expense relates to creation of a new product category for the cannabis market: recreational transdermal creams. The increase in share-based payments expense relates to options issued in the current period, which were not issued in prior periods.
Other income (expenses)
Other income for the year ended December 31, 2019 were $31,986 (2018 - $95,690 other loss). The increase primarily relates to change in fair value of derivative liability, which arose from the issuance of convertible debt denominated in a foreign currency (U.S. dollars). Also contributing to the increase is interest expense as a result of convertible notes issued during the year ended December 31, 2018. These factors were partially offset by interest income of $24,866 (2018-$3,025) in the year ended December 31, 2019.
During the year ended December 31, 2019:
On January 8, 2019, the Company granted 100,000 stock options to a consultant of the Company. The options entitle the holders to acquire common shares of the Company at $0.30 per share. These options vested January 8, 2019 and expire on January 8, 2021. During the year ended December 31, 2019, the consultant exercised 60,000 stock options at a price of $0.30 per share for total proceeds of $18,000. and the remaining 40,000 stock options were cancelled.
On October 8, 2019, the Company granted 300,000 stock options to two directors and a consultant of the Company. Each option granted can be exercised to purchase one common share of the Company at $0.30 per share. These options vested on October 8, 2019 and expires October 8, 2021.
On December 3, 2019, the Company granted 300,000 stock options to a consultant providing investor relations services. Each option granted can be exercised to purchase one common share of the Company at $0.30 per share. 100,000 stock options will vest on January 2, 2020, February 1, 2020, and March 2, 2020 and expires on December 3, 2020.
During the year ended December 31, 2019, the Company recorded share-based payment expense of $94,826. The stock options were valued using the Black Scholes Option Pricing model using the following weighted average assumptions: share price: $0.29 (2018 - $010) , expected life: three years (2018 – one year), expected volatility: 125% (2018 – 123%), dividend yield: 0% (2018 – 0%), and risk-free interest rate: 1.62% (1.81%).
During the year ended December 31, 2019, the company issued 60,000 common shares for the exercise of 60,000 stock options at $0.30 for cash proceeds of $18,000.
During the year ended December 31, 2019, the company issued 21,510 common shares for the exercise of 21,510 broker warrants at $0.45 for cash proceeds of $9,680.
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SELECTED ANNUAL FINANCIAL INFORMATION
The following table sets forth selected financial information for the Company for the fiscal years ended December 31, 2019 and 2018 and should be read in conjunction with the Company’s financial statements and related notes thereto for such periods.
The year‐end financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and are expressed in Canadian dollars.
| December 31, | 2019 | 2018 | ||
|---|---|---|---|---|
| Total assets | $ | 1,839,835 | $ | 2,725,280 |
| Total non-current financial liabilities | $ | - | $ | - |
| Revenues | $ | 302,382 | $ | 96,408 |
| Loss and comprehensive loss | $ | (834,346) | $ | (508,404) |
| Lossper share – Basic and diluted | $ | (0.05) | $ | (0.03) |
| Weighted average number of common shares outstanding |
16,172,978 | 16,117,642 |
Total assets as of December 31, 2019 were $1,839,835 (2017 - $2,725,280). The decrease of 885,445 during 2019 is primarily a result of increase in total expenses during the year.
Revenues were $302,382 for the year ended December 31, 2019 compared to revenues of $96,408 for the year ended December 31, 2018. The Company primarily derived its revenue from its relationship with Lighthouse Strategies, LLC.
Loss and comprehensive loss for the year ended December 31, 2019 was $834,346 (2018 - $508,404). The overall increase of $325,942 was due to an increase in management fees, advertising and promotion, office and general and professional fees.
DISCUSSION OF OPERATIONS
The following table summarizes the results of operations for the years ended December 31, 2019 and December 31, 2018:
| 2019 | 2018 | |||||
|---|---|---|---|---|---|---|
| Revenues | $ | 302,382 | $ | 96,408 | ||
| Gross margin | $ | 283,934 | $ | 82,491 | ||
| Operating expenses | $ | 1,151,863 | $ | 495,205 | ||
| Loss from operations | (867,929) | (412,714) | ||||
| Other items: | 33,583 | (95,690) | ||||
| Loss and comprehensive loss | $ | (834,346) | $ | (508,404) |
Operating expenses
Management and director fees increased by $160,000 to $360,000 from $200,000 in 2018.
The Company incurred advertising and promotions expense of $138,273 for the year ended December 31, 2019 (2018 - $59,620) due to the Company increasing operations.
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An increase in office and general expenses of $166,890 to $261,513 from $94,623 in 2018 was due to the Company increasing operations and purchasing office and lab equipment. An increased product development of $16,170 to $80,046 from $63,876 was due to further work on the Company’s products.
An increase in professional fees of $119,862 to $174,389 from $54,527 in 2018 was due to an increase in legal expenses incurred. Lastly, accounting fees incurred through the year were $83,001 (2018- $38,525)
The addition of product development expenses incurred during December 31, 2019 relates to the creation of a new product category for the cannabis market: recreational transdermal creams that will be available for sale during 2019.
Lastly the Company granted stock options to directors and officers. The options were fair valued using a Black Scholes model and the Company recorded an expense of $94,826 (2018 - $22,559) in share-based payments.
Other income (expenses)
The Company incurred $27,263 (2018 - $35,785) of interest expense as a result of promissory notes and convertible notes issued in the year. The Company also incurred $6,813 (2018- $7,275) in accretion expenses related to the amortization of the fair value component of the debt. The Company also recorded a net recovery of $47,063 (2018 – ($45,154)) related to the change in fair value of derivative liability which arose from the issuance of convertible debt in a foreign currency (US dollars).
SUMMARY OF QUARTERLY RESULTS
The audited consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”) applicable to the preparation of interim financial statements, including International Accounting Standards (“IAS”) 34, Interim Financial Reporting, as issued by the International Accounting Standards Board (“IASB”) and are expressed in Canadian dollars.
| Three months ended, December 31, 2019 $ |
September 30, 2019 $ |
June 30, 2019 $ March 31, 2019 $ |
|---|---|---|
| Total revenue 108,607 |
78,908 | 55,701 59,166 |
| Net loss (302,574) |
(141,161) | (203,960) (188,248) |
| Basic and diluted net lossper share (0.02) |
(0.01) | (0.01) (0.01) |
| Three months ended, December 31, 2018 $ |
September 30, 2018 $ |
June 30, 2018 $ March 31, 2018 $ |
| Total revenue 49,505 |
28,924 | 17,979 - |
| Net loss (205,711) |
(80,074) | (140,749) (81,869) |
| Basic and diluted net lossper share (0.01) |
(0.01) | (0.01) (0.00) |
i) The Company’s net loss increased in the three months ended December 31, 2019 as compared to the preceding quarter.
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ii) The Company’s net loss decreased in the three months ended September 30, 2019 as compared to the preceding quarter. The decrease is due to the change in the fair value of the derivative liability in Q3 from $25,082 to $72,304.
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iii) The Company’s net loss increased in the three months ended June 30, 2019 as compared to the preceding quarter. The increase is due to the Company incurring in advertising and promotion for $78,982 and $51,124 for office and general expense during the three months ended June 30, 2019 in comparison to $27,400 and
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$23,593 during the three months ended March 31, 2019, respectively. The increase was offset by a gain in the fair value of the derivative by $2,899 during the three months ended June 30, 2019 in comparison to the loss in the fair value of the derivative for $27,980 incurred during the three months ended March 31, 2019.
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iv) The Company’s net loss decreased in the three months ended March 31, 2019 as compared to the preceding quarter. The decrease is due to the Company incurring in legal expenses for $4,363 and transfer and filling fees for $2,327 during the three months ended March 31, 2019 in comparison to $10,156 and $13,635 during the three months ended December 31, 2018, respectively.
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v) The Company’s net loss increased in the three months ended December 31, 2018 as compared to the preceding quarter. The Company incurred advertising promotion fees of $88,136 and increased office and general expenses of $36,383. Revenues increased by $20,581 due to increases in packaging fees earned.
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vi) The Company’s net loss decreased in the three months ended September 30, 2018 as compared to the preceding quarter. The Company did not incur any share-based payments and had a decrease of $27,479 in professional fees. Revenues increased by $10,945 due to increases in packaging fees.
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vii) The Company’s net loss increased in the three months ended June 30, 2018 as compared to the preceding quarter. The Company incurred increased professional fees of $48,703 and incurred product development expenses of $11,295.
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viii) The Company’s net loss increased in the three months ended March 31, 2018 as compared to the preceding quarter. The Company incurred a larger foreign exchange loss increase by $9,078 and increases in office and general expenses of $10,206.
Loss and comprehensive loss for the year ended December 31, 2019 was $834,346 (2018 - $508,404). The overall increase loss of $325,942 was due to an increase in operating expenses of $656,657 and an increase in other income of $127,674 offset by an increase in gross margin of $201,443.
LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 2019 the Company had a working capital of $842,122 (December 31, 2018 - $1,582,627) and cash of $378,756 (December 31, 2018 - $468,969). The decrease in cash was primarily a result of the increase in total losses during the year.
Operating activities
Net cash used in operating activities for the year ended December 31, 2019 was $952,901 (2018 – $382,918). The decrease in cash from operating activities mostly relates to the losses incurred during the year ended December 31, 2019 for $835,943 (2018 - $508,404) offset by non-cash adjustments and changes in working capital items for $55,188 (2018 – $105,687), The non-cash adjustments are comprised of unpaid interest for $27,263, accretion expense for $6,813 and a change in in the fair value of the derivative liability for $47,064 offset by a decrease in changes in working capital for inventory purchases by $85,604.
Investing activities
For the year ended December 31, 2019, cash provided by investing activities was 895,196 (2018 – ($1,500,000)). This relates to redemption of the GIC for a cash equivalent readily convertible to cash, as well as the purchase of equipment for $31,668.
Financing activities
Net cash used in financing activities for the year ended December 31, 2019 was $28,151 (2018 - $2,061,675). The decrease relates to the repayment of promissory notes for $55,831 offset by the proceeds received from the issuance of shares for $27,680.
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CSE: OVAT
OFF BALANCE SHEET ARRANGEMENTS
The Company did not have any off-balance sheet arrangements during the year ended December 31, 2019.
RELATED PARTY TRANSACTIONS
The Company has identified its directors and certain officers as its key management personnel. Current directors and officers of the Company are as follows:
Logan Anderson, Chief Financial Officer Terry Howlett, Chief Executive Officer
Doreen McMorran, Chief Operating Officer and Director Ian Howard, Director Joan Chypyha, Director David Ryan, Head of Investor Relations and Director
The remuneration of directors and key management personnel for the period ended is as follows:
| December 31, 2019 | December 31, 2018 | |||
|---|---|---|---|---|
| Management fees | $ | 319,043 | $ | 150,000 |
| Director fees | 5,000 | 50,000 | ||
| Share-basedpayments | 35,937 | 19,618 | ||
| $ | 359,980 | $ | 219,618 |
Related party payables
As at December 31, 2019, due to related parties of $19,478 (2018 - $144,782) consists of accrued interest and management fees due to related parties. These amounts are non-interest bearing, unsecured and due on demand.
The Company entered into the following related party transactions during the year ended December 31, 2019:
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a) Included in management fees, salaries and benefits fees are fees of $42,000 (2018 - $42,000) charged or incurred by Amteck Financial Corp., a company controlled by Logan Anderson, the Chief Financial Officer of the Company. Amounts payable as at December 31, 2019 were $nil (2018 - $10,500);
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b) Included in management fees, salaries and benefits are fees of $152,440 (2018 - $72,000) charged or incurred by Terry Howlett, the Chief Executive Officer (“CEO”). Amounts payable as at December 31, 2019 were $1,339 (2018 - $72,000)
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c) Included in management fees, salaries and benefits are fees of $36,000 (2018 - $36,000) charged or incurred by David Ryan, Head of Investor Relations and Director of the Company; Amounts payable as at December 31, 2019 were $3,150(2018 - $nil)
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d) Included in management fees, salaries and benefits are fees of $124,603 (2018 - $48,000) charged or incurred by Doreen McMorran, Chief Operating Officer and Director of the Company; Amounts payable as at December 31, 2019 were $6,276 (2018 - $48,000).
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e) Included in management fees, salaries and benefits are directors’ fees of $5,000 (2018 - $2,000) charged or incurred by directors of the Company. Amounts payable as at December 31, 2019 were $2,000 (2018 - $2,000)
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f) On September 12, 2019, Ovation Science USA Inc. purchased furniture and lab equipment from a company, Skinvisible Pharmaceuticals Inc., with two common directors, Terry Howlett and Doreen McMorran, for $97,767 ($75,000 USD), which was measured using the cost model. The business purpose of the transaction was to speed to market to extend product lines. Of the furniture and equipment purchased $31,668 (USD$24,000) was capitalized.
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CSE: OVAT
DISCLOSURE OF OUTSTANDING SECURITIES DATA
8,387,501 common shares (the “Escrowed Securities”) are held by and are subject to the terms of an escrow agreement dated April 10, 2018 and the holders of the Escrowed Securities. The shares are subject to Escrow with the following release dates.
| ease dates. | |
|---|---|
| On the Listing Date | 1/10 of the Escrowed Securities |
| 6 months after the Listing Date | 1/6 of the remaining Escrowed Securities |
| 12 months after the Listing Date | 1/5 of the remaining Escrowed Securities |
| 18 months after the Listing Date | 1/4 of the remaining Escrowed Securities |
| 24 months after the Listing Date | 1/3 of the remaining Escrowed Securities |
| 30 months after the Listing Date | 1/2 of the remaining Escrowed Securities |
| 36 months after the Listing Date | the remaining Escrowed Securities |
As at April 29, 2020, the total number of outstanding common shares, warrants and stock options are 23,234,631 4,647,490 and 1,150,000, respectively.
PROPOSED TRANSACTIONS
The Company does not have any proposed transactions.
FINANCIAL INSTRUMENTS
The Company has classified its short-term investments, trade and other receivables, accounts payable and other liabilities, due to related parties and convertible notes as financial assets and financial liabilities measured at amortized cost. Such assets and liabilities are recognized initially at fair value inclusive of any directly attributable transaction costs and subsequently carried at amortized cost using the effective interest method, less any impairment losses. The Company has classified its cash as a financial asset measured at fair value through profit and loss.
Financial assets and financial liabilities are offset, and the net amount presented in the statements of financial position when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.
The Company’s derivatives are carried at fair value and are reported as assets when they have a positive fair value and as liabilities when they have a negative fair value. Changes in the fair values of derivative financial instruments are reported in the statements of loss and comprehensive loss.
CHANGES IN ACCOUNTING POLICIES
The significant accounting policies applied in the preparation of the financial statements are in Note 2 of the audited financial statements for the year ended December 31, 2019.
Initial adoption of new accounting standards
Adoption of new accounting standards have been disclosed in Note 2 of the Company’s audited consolidated financial statements for the year ended December 31, 2019.
Future accounting standards issued but not yet in effect
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CSE: OVAT
The Company has reviewed new and revised accounting pronouncements that have been issued but are not yet effective. The Company has not early adopted any of these standards and is currently evaluating the impact, if any, that these standards might have on its financial statements.
Pronouncements that may have a significant impact to the Company have been disclosed in Note 2 of the Company’s audited consolidated financial statements for the year ended December 31, 2019.
Other accounting standards or amendments to existing accounting standards that have been issued but have future effective dates are either not applicable or are not expected to have a significant impact on the Company’s financial statements.
SUBSEQUENT EVENTS
Subsequent to December 31, 2019, the Company launched its new product “DermSafe”, which uses chlorhexidine gluconate; an ingredient used worldwide in hospitals as it has a proven ability to kill both bacteria and viruses. DermSafe binds to the hands and resists wash-off and rub-off for up to 4 hours post application while continuing to kill both bacteria and viruses. The Company has licensed DermSafe exclusively and the intent is to provide this product as one of the Company’s product offerings long-term.
Subsequent to December 31, 2019, the Company has generated revenues in China, the United Kingdom, and Canada, from DermSafe product sales.
No DermSafe sales have been made in any other Countries as at the date of this report
ADDITIONAL INFORMATION
Additional information and the documents filed with the Canadian securities regulatory authorities are available at the Company’s profile on http://www.sedar.com and on the Company’s website http://ovationscience.com/
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CSE: OVAT