Nutriband Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2019. The filing is unaudited. Comparisons with 2018 are affected by the August 1, 2018 acquisition of 4P Therapeutics; its results are included only after acquisition.
Business context
Nutriband is developing transdermal pharmaceutical products, with an abuse-deterrent fentanyl patch as its lead program. The products remain in development and require FDA approval before they can be marketed. The company also earns revenue from contract research and development services and sales of consumer patches to a South Korean distributor. It effected a one-for-four reverse stock split in 2019; reported share figures reflect the split.
Financial performance and position
| Metric | Three months ended July 31, 2019 | Six months ended July 31, 2019 |
|---|---|---|
| Revenue | $74,913 | $268,503 |
| Cost of revenue | $117,959 | $316,753 |
| Gross profit (loss) | $(43,046) | $(48,250) |
| Operating expenses | $406,566 SG&A | $974,523 SG&A |
| Operating loss | $(449,612) | $(1,022,773) |
| Net loss | $(450,565) | $(1,023,918) |
| Basic and diluted loss per share | $(0.08) | $(0.19) |
- Six-month revenue comprised $126,053 of services and $142,450 of product sales, all to the South Korean distributor; the product sales occurred in the quarter ended April 30, 2019. No product sales were reported in the quarter ended July 31.
- Gross margin was negative in both periods. Management attributed service costs in part to fixed personnel and facility expenses.
- Cash at July 31 was $13,833, down from $474,653 at January 31. Six-month operating cash use was $510,568; investing cash flow was zero and financing provided $50,000 from notes.
- Current assets were $152,875 and current liabilities $720,009, yielding a working-capital deficit of $567,134. Total assets were $2.35 million and stockholders’ equity was $1.63 million.
- Notes payable were $90,000 at July 31, comprising interest-free, on-demand loans from a minority stockholder. A further $50,000 was borrowed from that stockholder on August 14, increasing the balance to $140,000.
Changes versus comparable periods
Revenue rose from zero in the 2018 quarter and six-month period, reflecting 4P service revenue and distributor sales. Quarterly net loss narrowed from $1.88 million to $450,565; six-month net loss narrowed from $2.33 million to $1.02 million. The filing attributes much of the expense reduction to lower payroll and stock-based compensation, partly offset by higher legal costs. Six-month operating cash use increased from $382,942 to $510,568, while financing inflows fell from $1.48 million to $50,000.
Outlook, risks and notable matters
- Going concern: Management states that substantial doubt exists about the company’s ability to continue as a going concern. It needs significant additional financing and has very limited cash.
- Development funding: The company estimates $5.0 million for development of its lead fentanyl product, including clinical manufacturing and trials, but says actual costs could be substantially higher. It lacks funds to complete development and is pursuing a proposed public offering; even a completed offering would not be sufficient to complete development and clinical testing.
- Revenue uncertainty: Management did not expect significant distributor revenue during the remainder of fiscal 2020 because South Korean regulatory clearance for retail sales had not been obtained. The distributor agreement was extended to April 30, 2020. Service revenue is also uncertain, with no long-term contracts and a significant decline from 4P’s largest customer.
- Regulatory and product risk: Pharmaceutical products require development and FDA approval, with no assurance of approval. The filing says the company’s consumer products are not being marketed in the United States and it is not seeking U.S. approval for them.
- Litigation: The company is pursuing litigation related to its prior Advanced Health Brands acquisition, including an appeal and a separate securities-fraud action seeking return of shares and damages. Defendants filed motions to dismiss; the filing does not state an outcome.
- Controls: Management concluded disclosure controls were ineffective, citing material weaknesses including lack of segregation of duties and qualified accounting personnel and reliance on outside consultants. It said remediation was unlikely in the near future.
- Other items: Adoption of lease accounting resulted in a $28,827 right-of-use asset and lease liability at February 1, 2019. The 4P acquisition included a 6% royalty on revenue from specified abuse-deterrent intellectual property; no value was recorded for the contingent royalty.
Important facts for investors to verify
- Available cash, the timing and terms of new financing, and whether the company can fund operations and product development.
- Progress, cost estimates, and regulatory milestones for the lead product and other pipeline candidates.
- South Korean regulatory clearance and distributor purchases, plus the stability of 4P contract-service revenue and margins.
- Status and potential financial consequences of the Advanced Health Brands litigation and related share-return claims.
- Reported figures contain apparent inconsistencies: the comprehensive-income statement section lists a quarterly “net loss” of $(573,353), while the operations statement reports $(450,565); the MD&A also cites 2018 quarterly SG&A of $1,876,772 versus $1,878,772 in the financial statements, and one MD&A passage gives distributor revenue of $143,450 versus $142,450 in the revenue table. Investors should confirm the intended figures in the filed statements and related disclosures.