Nutriband Inc. — FY2021 Form 10-K Summary
Reporting period: Fiscal year ended January 31, 2021, compared with the year ended January 31, 2020. This is an annual filing, not a standalone fourth-quarter report. The filing was signed April 2, 2021.
Business context
Nutriband’s intended business is developing transdermal pharmaceutical products, led by its AVERSA abuse-deterrent fentanyl patch. Due to limited funding, pharmaceutical product development was on hold, and the company’s active operations were contract services and product manufacturing/sales. The August 2020 acquisition of Pocono Coated Products’ transdermal, topical, cosmetic and nutraceutical business, including Active Intelligence, expanded manufacturing operations. No pharmaceutical product was approved for marketing.
Financial performance and position
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $943,702 | $370,647 |
| Cost of revenue | $582,378 | $549,107 |
| Gross profit (loss) | $361,324 | $(178,460) |
| Gross margin | 38.3% | (48.2%) |
| SG&A | $2,957,269 | $1,790,980 |
| Operating loss | $(2,595,945) | $(1,969,440) |
| Net loss | $(2,932,828) | $(2,721,627) |
| Loss per share, basic and diluted | $(0.51) | $(0.50) |
| Cash from (used in) operations | $(297,055) | $(894,470) |
- Revenue increased about 155%. FY2021 revenue included $206,183 of R&D services, $583,324 of consumer product sales to the South Korean distributor for preliminary marketing efforts, and $154,195 from the acquired Pocono/Active Intelligence business. The acquired operations were included only from September 2020.
- SG&A rose by about $1.17 million, primarily reflecting $1,954,875 of non-cash stock compensation, partly offset by lower professional fees. Interest expense was $280,686, including $272,130 of debt-discount amortization.
- At January 31, 2021, cash was $151,993, current assets were $314,188, and current liabilities were $2,568,606, producing a working-capital deficit of $2,254,418. The prior-year deficit was $1,979,141.
- Total liabilities were $2,815,473. They included a $1,402,523 related-party note payable, $113,885 of current notes payable, $150,063 of long-term notes payable, and $121,544 of finance-lease liabilities. The Pocono acquisition note had a stated principal amount of $1.5 million and was due in August 2021 or after a qualifying capital raise; its balance-sheet carrying value differs because of debt discount and other presentation.
- Stockholders’ equity was $7,111,946, compared with $175,433 a year earlier; accumulated deficit was $11,835,105. Goodwill was $7,529,875, including $5,810,640 recorded in the Pocono acquisition.
Material changes and unusual items
- The Pocono acquisition consideration was reported as $6,085,180 in common stock and a $1.5 million principal promissory note. The acquisition added equipment, customer relationships, intellectual property and goodwill.
- A March 2020 private placement generated approximately $515,000 from units of common stock and warrants. The company used proceeds to repay its October 2019 convertible notes, including a prepayment fee; the notes were paid off and the related derivative liability was eliminated. A separate $275,000 shareholder loan was converted into 25,000 shares.
- FY2021 included $2,004,875 of stock-based compensation, largely associated with shares issued to officers and current and former directors.
- After year-end, BPM Inno completed a $700,000 stock purchase in February 2021, and the company entered into a distribution arrangement for products licensed from Rambam Med-Tech. These are subsequent events, not FY2021 operating results.
Outlook, risks and contingencies
- Management said financing, lower planned overhead, increased sales commitments and acquired-business revenue supported its view that it could meet obligations for at least one year after issuance of the financial statements. However, the auditor identified going concern as a critical audit matter, citing losses, negative working capital, operating cash outflow and uncertainty around execution of management’s plans.
- Management budgeted $5.0 million for development of the abuse-deterrent fentanyl product, including clinical manufacturing and trials, while warning total costs could be substantially higher. Development depends on additional financing or a suitably funded strategic partner; there is no assurance either will be available on acceptable terms.
- Key risks include FDA approval and clinical-trial uncertainty, manufacturing and controlled-substance licensing requirements, competition, product liability, patent protection, COVID-19 disruption, customer concentration and dependence on a small number of customers. One customer represented 62% of FY2021 revenue.
- Sales to the South Korean distributor were for preliminary marketing efforts; the filing says regulatory approval for retail sales in South Korea had not been obtained. These sales should not be confused with approved retail commercialization.
- Disclosure controls and internal control over financial reporting were reported ineffective at January 31, 2021, with material weaknesses involving limited internal audit capacity, insufficient review, inadequate segregation of duties and monitoring of complex transactions. The auditor gave an unmodified opinion on the financial statements but did not audit internal-control effectiveness.
- The company disclosed an SEC cease-and-desist settlement relating to prior filing disclosures; the named officers each agreed to pay a $25,000 civil penalty, with no monetary penalty imposed on the company. Litigation concerning the Advanced Health Brands transaction remained unresolved; the company sought return of 1.2 million shares and damages.
Important facts for investors to verify
- Whether post-year-end financing, sales commitments and acquired-business cash generation have actually provided adequate liquidity, and the status of the Pocono note repayment or refinancing.
- Customer concentration, the durability and margins of acquired manufacturing revenue, and the regulatory status and commercial nature of South Korean distributor sales.
- Whether pharmaceutical development has resumed, the funds required and available, and progress toward clinical trials, FDA engagement and required manufacturing approvals.
- The valuation assumptions supporting acquired goodwill and intangible assets; the auditor identified acquisition valuation and goodwill impairment as critical audit matters.
- Progress in remediating material weaknesses in financial reporting controls and developments in the Advanced Health Brands litigation.