Nutriband Inc. — Q1 FY2021 (quarter ended April 30, 2020)
Business context. Nutriband develops transdermal pharmaceutical products, including an abuse-deterrent fentanyl patch, and also earns revenue from contract research services and consumer patch sales. The quarter’s financial statements are unaudited. The company reported that its operations had been temporarily closed and product development suspended pending substantial funding.
Financial performance
| Metric | Three months ended Apr. 30, 2020 | Prior-year period |
|---|---|---|
| Revenue | $119,364 | $193,590 |
| Cost of revenue | $74,939 | $198,794 |
| Gross profit (loss) | $44,425 | $(5,204) |
| Gross margin | 37.2% | (2.7%) |
| SG&A | $191,917 | $567,957 |
| Operating loss | $(147,492) | $(573,161) |
| Net loss | $(412,194) | $(573,353) |
| Basic and diluted loss per share | $(0.08) | $(0.11) |
| Operating cash used | $(201,514) | $(272,553) |
Revenue comprised $61,320 of consumer product sales to the South Korean distributor and $58,044 of professional services. Revenue fell about 38% year over year, principally reflecting lower product sales. Gross profit improved from a loss as cost of revenue declined; management cited lower facility-related costs after moving from the 4P facilities. SG&A declined mainly due to lower payroll-related, non-cash compensation and legal expenses. Gross margin is calculated from reported revenue and cost of revenue.
Financial position and capital
- Cash was $20,644 at April 30, 2020, versus $10,181 at January 31, 2020. Current assets were $66,705 and current liabilities $725,903, leaving a $659,198 working-capital deficit, improved from $1,979,141.
- Total assets were $2.20 million and stockholders’ equity was $1.47 million at quarter-end; accumulated deficit was $9.31 million.
- Financing activities provided $211,977 net cash. The company raised $515,108 in a March private placement of 46,828 shares and warrants, and repaid convertible notes with related prepayment costs. It also converted $275,000 of shareholder notes into 25,000 shares.
- The $270,000 convertible notes were prepaid in March for total payments of $345,565, including a $69,131 prepayment fee and accrued interest. Quarter expenses included $202,500 of debt-discount amortization, a $12,500 debt-extinguishment loss, and $205,167 of total interest expense as reported in the statement of operations. The derivative liability was reduced to zero; $906,678 of warrant liability was reclassified to equity.
- Common shares outstanding were 5,512,928 as of June 4, 2020. The March financing and debt conversion increased shares outstanding; warrants may create additional dilution.
Outlook, risks, and notable items
- Going concern: Management said substantial doubt exists about the company’s ability to continue as a going concern for at least one year. It depends on significant additional financing, revenue from services, product development, FDA approvals and commercialization. Without funding, it may be unable to continue in business; the statements include no adjustments for this uncertainty.
- Development and funding: The company said it lacks funds to develop its lead product and that development activities are suspended. It budgeted $5.0 million for research and development, clinical manufacturing and trials for the abuse-deterrent fentanyl system, while warning costs could be substantially higher. No assured financing or FDA approval was disclosed.
- COVID-19 and distribution: The company cited the pandemic and declining business as contributing to its cash shortage and temporary closure. Best Choice had not obtained required South Korean regulatory approval; the company did not expect significant distributor revenue until approval. Minimum purchases were unmet, but the agreement was extended and minimums restarted April 30, 2020.
- Contingencies: The company described ongoing litigation relating to its Advanced Health Brands acquisition, including a March 2020 appellate reversal allowing an amended complaint. Related proceedings in Ohio are stayed pending the Florida litigation; a separate securities-fraud suit remains pending.
- Controls: Management concluded disclosure controls were ineffective and reported material weaknesses involving segregation of duties and limited qualified accounting personnel. It said financial constraints made near-term remediation unlikely.
- Guidance: No quantified revenue or earnings guidance was provided. Management anticipated near-term revenue from services and consumer product sales, subject to customer activity and regulatory constraints.
Important facts for investors to verify
- Availability, amount, timing and terms of additional financing, and whether operations can resume.
- Current status of the going-concern uncertainty, cash position and working-capital deficit after quarter-end.
- Development, clinical-trial and FDA-approval milestones and the funding required to achieve them.
- South Korean regulatory approval, distributor purchases and the status of Best Choice’s minimum-sales commitments.
- Potential share dilution from outstanding warrants and the outcome of the disclosed litigation.
- Progress in remediating the reported material weaknesses in financial reporting controls.