MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
This Management's Discussion and Analysis ("MD&A") for FluroTech Ltd. ("FluroTech", or the "Company") is dated November 25, 2021 and should be read in conjunction with FluroTech's unaudited September 30, 2021 condensed interim consolidated financial statements and the December 31, 2020 audited financial statements and related notes thereto.
The Company's financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). Unless otherwise indicated, all references to $ in this MD&A are to Canadian dollars. References to US$ or US dollars herein are to United States dollars.
In the following discussion, the three and nine months ended September 30, 2021 may be referred to as "Q3 2021" and "the September 2021 period", respectively, and "the 2021 periods" collectively, and the comparative three and nine months ended September 30, 2020 may be referred to as "Q3 2020" and "the September 2020 period", respectively, and "the 2020 periods" collectively.
Please read the Advisory Section of this MD&A which provides information on forward looking information and other information. Additional information relating to the Company, including FluroTech's Financial Statements, news releases, Annual Information Form ("AIF") and other required filing documents are available under the Company's profile on SEDAR at www.sedar.com. The aforementioned documents are issued and made available in accordance with legal requirements but are not incorporated by reference into this MD&A.
Overview
FluroTech is focused on commercializing fluorescence spectroscopy technology for testing in various industries.
The Company expanded the functionality of its fluorescence spectroscopy technology to test for COVID-19, and in connection therewith, has acquired a 100% interest in FluroTest Diagnostics Systems Ltd. ("Diagnostic Systems"), a company focused on commercializing a Pandemic and Emerging Disease Defense Platform ("PEDDP"), initially targeting COVID-19. The goal for the PEDDP is that it will have the ability to test, thousands of samples per hour for COVID-19 at the point of collection of the nasal sample and provide fast, accurate, secure results.
During 2020, advances were made in the development of the PEDDP and completed successful proof of concept studies on its COVID-19 antigen immunoassay. Patent applications were filed with the United States Patent and Trademark Office with respect to certain aspects of its proprietary test method and the PEDDP.
FluroTech was initially focused on commercializing its spectroscopy testing technology for in-house cannabis testing. However, the market did not materialize as management anticipated. As such, the testing business is reviewing its strategic options. Throughout 2021, the Company is in discussion with a US based company for the sale of the cannabis testing business.
FluroTest Diagnostic Systems Ltd.
At the end of 2020, the Company owned 26.3% of the outstanding common shares of FluroTest Systems Ltd. ("Systems"), an Alberta company, and Systems owned 95% of the outstanding common shares of FluroTest, LLC ("FluroTest"). Danny Dalla-Longa, an executive and director of the Company is also a director of Systems.
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In April 2021, Systems acquired the remaining 5% of the outstanding shares of FluroTest in exchange for common shares of Systems, thereby reducing the Company's ownership of Systems to 25%.
On May 20, 2021, pursuant to a three-cornered amalgamation agreement between the Company, its wholly- owned subsidiary incorporated on March 12, 2021, 2330853 Alberta Ltd. ("Subco") and Systems, the Company acquired the remaining 75% of the outstanding shares of Systems that the Company did not already own (the "Acquisition"). Consideration for the Acquisition was the issuance of 40,705,361 common shares of the Company in exchange for 40,705,361 common shares of Systems. In connection with the Acquisition, Subco and Systems amalgamated to form Diagnostic Systems, a wholly-owned subsidiary of the Company following the completion of the Acquisition.
Prior to the Acquisition, the Company had significant influence over Systems and accounted for its 25% ownership interest in Systems using the equity method and recognized $295,335 for the Company's share of Systems loss for the period.
The Company accounted for the Acquisition as a business combination using the step-acquisition method whereby the Company measured the May 20, 2021 fair value of its 25% ownership in Systems and recognized a $27,501 gain on the equity investment and then allocated the Acquisition purchase price to the fair value of the assets acquired and liabilities assumed on the acquisition date as follows:
Fair value of net assets: | ||
Cash | $ | 298,064 |
Prepaid expenses and deposits | 279,404 | |
Property and equipment | 265,180 | |
Goodwill | 7,020,313 | |
Accounts payable and accrued liabilities | (229,898) | |
Due to FluroTech | (1,849,253) | |
Shareholder loan | (120,700) | |
5,663,110 | ||
Book value of investment in Systems on May 20, 2021 | 321,672 | |
Gain on step acquisition | (27,501) | |
$ | 5,957,281 | |
Consideration: | ||
40,705,361 common shares | $ | 5,957,281 |
The shareholders of Systems who exchanged their shares for 40,705,361 common shares of the Company, entered into voluntary agreements, pursuant to which they agreed not to sell or dispose of any of the 40,705,361 common shares of the Company without the prior written consent of the Company or other than as permitted pursuant to the release schedule below:
- 50% of the 40,705,361 common shares (20,352,681 common shares) released on September 20, 2021 (the "Initial Release Date"); and
- the remaining 20,352,680 common shares released 1/12 per month for 12 months following the Initial Release Date.
As a result, the $5,957,281 fair value of share consideration is measured at the market price of the Company's shares on the acquisition date, discounted for the effect the escrow release schedule has on the marketability of the 40,705,361 common shares of the Company.
The preliminary estimates of the fair value of net assets acquired were made by management at the time of preparation of the September 30, 2021 unaudited condensed interim consolidated financial statements based on available information and may be adjusted as the amounts subject to estimates are finalized. Goodwill is attributed to Diagnostic Systems' research and development capabilities with respect to a high-volumeCOVID-19 rapid antigen testing system.
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Outlook
FluroTest has been developing its PEDDP since late January 2021. The Company has made significant progress in its research and development efforts during this 10-month period. The Company has optimized its testing protocol and is in the process of improving the accuracy sufficient to proceed to clinical trials. The Company has recruited key advisors with deep experience in both specific technologies being deployed and commercialization of other diagnostic assays unrelated to COVID. Based on the results from the new protocol, the Company believes it is positioned to achieve a disruptive breakthrough in the development of its "point of entry/point of access" testing solution.
Important recent development include:
Reduction of steps in sample processing - This resulted in an optimized sample processing protocol reducing time and complexity as well as the elimination of certain laboratory processing equipment in the testing system solution.
Testing protocol simplification - The Company has made great strides in refining the type of instrumentation required to read processed test samples, further reducing the time necessary for each reading as well as reducing the capital cost of field-based instrumentation hardware by as much as 50%.
Materials cost per test reduced - While initial estimates of the direct cost of each test to the Company approximated US$5.00 to US$6.00, the Company's optimized protocol development efforts produced a cost estimate per test of less than US$1.00, thus providing the Company with significant flexibility in pricing tests much lower to the consumer while still maintaining favorable gross profit margins.
Platform solution cost per test improved - The optimization of sample processing and equipment necessary to process tests will lower the capital cost per platform by as much as 50%, thus making the platform solution more affordable to significantly more potential customers and enabling more frequent testing.
The Company expects that it will complete test optimization, protocol development and prepare to enter clinical trials in three to four months. The anticipated go forward costs to complete development are $1.3 million. Clinical trials are anticipated to costs an additional $1.4 million.
Readers are cautioned that, although FluroTest has achieved proof of concept prototype, the testing method and device is still in the pre-approval stage and accordingly FluroTest is not currently making any express or implied claims that the technology can, or will be able to, accurately detect the COVID-19 virus.
In order to continue its ongoing PDP-related development activities, the Company will require additional financing. Failure to obtain such financing on a timely basis could cause the Company to miss acquisition opportunities and/or to reduce or terminate its operations. There can be no assurance that debt or equity financing will be available or for an amount sufficient to meet the Company's needs and intentions, or, if debt or equity financing is available, that it will be on terms acceptable to the Company.
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Research and Development Initiatives Summary
Project | Description | 9 months | 2020 | 2019 | Status |
2021 | Annual | Annual | |||
Pandemic | Development | $981,020 | $274,600* | $Nil | Proof of concept achieved. |
Defense | support for Systems' | Product optimization underway. | |||
Platform | COVID-19 testing | Pre-clinical trials to be finalized | |||
platform | |||||
in September. | |||||
Clinical trials and FDA | |||||
submission expected in Q4 | |||||
2021. | |||||
CompleTestTM | Analytical testing | $Nil | $479,900 | $1,390,000 | Product available for sale. |
platform for testing | System optimization expected | ||||
cannabis for | to continue. | ||||
potency, heavy | |||||
metals and tracking. | |||||
Biotracking | Nanotechnology | $Nil | $15,000 | $219,000 | Achieved proof of principle. |
used to mark | No further expenditures | ||||
cannabis and create | expected until a strategic | ||||
traceability. | partner is determined. | ||||
Heavy Metal | Quantification of the | $Nil | $Nil | $59,000 | Beta testing of cadmium |
Test | presence of | completed. | |||
Development | cadmium, mercury | No further expenditures | |||
and lead in | expected until a strategic | ||||
cannabis. | |||||
partner is determined. | |||||
*$270,700 of costs incurred has been or will be recovered from Systems | |||||
Select Financial Information |
September 30 | December 31 | December 31 | |
(expressed in $, except shares) | 2021 | 2020 | 2019 |
Working capital | 457,042 | 407,654 | 2,909,991 |
Total assets | 8,827,052 | 757,366 | 3,606,043 |
Non-current financial liability (1) | 24,384 | 21,545 | - |
Share capital | 20,365,020 | 11,222,334 | 11,222,334 |
Total common shares outstanding | 120,685,542 | 54,273,815 | 54,273,815 |
September | September | |||
(expressed in $, except shares) | Q3 2021 | Q3 2020 | 2021 period | 2020 period |
Loss from continuing operations | (1,164,431) | (124,487) | (3,000,828) | (607,633) |
Loss from discontinued operations | (473) | (176,683) | (45,342) | (1,016,305) |
Loss for the period | (1,164,904) | (301,170) | (3,046,170) | (1,623,938) |
Loss per share - basic and diluted | ||||
Continuing operations (2) | (0.01) | (0.00) | (0.03) | (0.01) |
Discontinued operations (2) | (0.00) | (0.00) | (0.00) | (0.02) |
Weighted average number of shares | 120,685,542 | 54,273,815 | 95,738,454 | 54,273,815 |
Distributions or cash dividends | Nil | Nil | Nil | Nil |
- The non-current financial liability is comprised of the Canada Emergency Business Account ("CEBA") loan.
- All per share figures are based on the basic weighted average number of shares outstanding in the period. The effect of options is anti-dilutive. Per share amounts may not add due to rounding.
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Working capital
Working capital at September 30, 2021 was only slightly higher than at December 31, 2020 due primarily to $4.1 million of aggregate net proceeds from the completion of a unit private placement and the exercise of warrants and options during the September 2021 period and $0.3 million of acquired cash, working capital and shareholder loan, offset by $1.7 million of advances made to Systems, $2.2 million of cash flow used by operating activities and $0.4 million of property and equipment purchases.
Total assets
Total increased from $0.8 million at December 31, 2020 to $8.8 million at September 30, 2021 due primarily to a $0.5 million increase in cash, $7 million of goodwill related to the Acquisition and $0.5 million increase in property and equipment.
Share capital
Share capital increased due to the completion of a unit private placement and the exercise of warrants and options during the September 2021 period and 40.7 million common shares issued as consideration for the Acquisition.
Loss from continuing operations and discontinued operations
Changes in loss from continuing operations and loss from discontinued operations are discussed in the Operating Results section below.
Operating Results
September | September | |||||
2021 | 2020 | |||||
(expressed in $) | Q2 2021 | Q2 2020 | Variance | period | period | Variance |
Expenses | ||||||
General and administrative | 242,687 | 107,369 | 135,318 | 972,254 | 536,007 | 436,247 |
Research and development | 687,290 | - | 687,290 | 981,020 | - | 981,020 |
Share-based compensation | 195,197 | 9,584 | 185,613 | 719,748 | 57,448 | 662,300 |
Depreciation | 38,261 | 8,647 | 29,614 | 62,397 | 36,768 | 25,629 |
Total expenses | 1,163,435 | 125,600 | 1,037,835 | 2,735,419 | 630,223 | 2,105,196 |
Interest income | - | (1,113) | 1,113 | - | (22,590) | 22,590 |
Other (income) expenses (3) | 996 | - | 996 | (2,425) | - | (2,425) |
Share of Systems loss | - | - | - | 295,335 | - | 295,335 |
Gain on step acquisition | - | - | - | (27,501) | - | (27,501) |
Loss from continuing operations | (1,164,431) | (124,487) | (1,039,944) | (3,000,828) | (607,633) | (2,393,195) |
Loss from discontinued operations | (473) | (176,683) | 176,210 | (45,342) | (1,016,305) | 970,963 |
Loss for the period | (1,164,904) | (301,170) | (863,734) | (3,046,170) | (1,623,938) | (1,422,232) |
- Other expenses for Q3 2021 and the September 2021 period are comprised of $996 and $2,839, respectively, of accretion of CEBA loan and $nil and $5,264, respectively, of gains on the disposal of property and equipment.
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