Nutriband Inc. — Form 10-Q Summary
Reporting period: Unaudited quarter and six months ended July 31, 2020; comparative periods ended July 31, 2019. Amounts are in U.S. dollars unless stated otherwise.
Business context
Nutriband’s principal focus is developing transdermal pharmaceutical products, including an abuse-deterrent fentanyl patch that requires further development and FDA approval before it can be marketed. The company also earns revenue from contract research and development services and consumer patch sales to a South Korean distributor. Its consumer products had not received the regulatory approval needed for retail sales in South Korea.
Financial performance and position
| Metric | Three months ended July 31, 2020 | Six months ended July 31, 2020 |
|---|---|---|
| Revenue | $84,450 | $203,814 |
| Cost of revenue | $116,937 | $191,876 |
| Gross profit (loss) / margin | $(32,487) / approximately (38.5%) | $11,938 / approximately 5.9% |
| Operating loss | $(225,818) | $(373,310) |
| Net loss | $(225,869) | $(638,063) |
| Net loss per share, basic and diluted | $(0.04) | $(0.12) |
| Operating cash used | Not presented separately | $(313,652) in cash-flow statement |
At July 31, cash was $39,248, current assets were $90,417, total assets were $2,199,288, total liabilities were $902,632, and stockholders’ equity was $1,296,656. Current liabilities were $867,762. The company reported a working capital deficiency of $774,345 in MD&A, although the balance-sheet figures imply a deficiency of $777,345.
Debt included a $100,000 interest-free, demand loan from a minority shareholder and a $34,870 PPP loan bearing 0.98% interest and maturing June 17, 2022. The October 2019 convertible notes were prepaid in March 2020; the company reported a $69,131 early prepayment fee. Cash from financing activities was $342,719 for the six months, including $515,108 from a private placement, offset in part by debt repayment and related-party payments.
Changes versus prior comparable periods
- Quarterly revenue rose 12.7% from $74,913; quarterly net loss narrowed from $450,565. Quarterly gross loss improved from $43,046 to $32,487.
- Six-month revenue fell 24.0% from $268,503, while gross result improved from a $48,250 loss to $11,938 profit. Six-month net loss narrowed from $1,023,918.
- Six-month SG&A declined to $385,248 from $974,523, primarily due to lower payroll, noncash compensation, and legal fees. However, 2020 included $205,218 of interest expense, largely reflecting $202,500 amortization of debt discount, as well as the prepayment fee and a $12,500 debt-extinguishment loss.
- Cash increased from $10,181 at January 31, 2020. The derivative liability fell from $928,774 to zero after repayment of the convertible notes and reclassification of warrants to equity.
Outlook, risks, and unusual items
- Management stated that limited cash and the COVID-19-related business decline had led to suspended or temporarily closed operations and product-development activities. The filing warns of substantial doubt about the company’s ability to continue as a going concern without significant additional financing.
- The company estimated a $5.0 million budget for development of its lead fentanyl product, while cautioning that total costs could be substantially higher. It lacked funds to proceed and could not assure financing, FDA approval, or a successful product launch.
- Management expected South Korean distributor revenue to increase substantially during the remainder of the fiscal year, but regulatory approval had not been obtained, minimum purchases had not been met, and the filing provides no quantified forecast.
- As a subsequent event, on August 31, 2020, Nutriband entered an agreement to acquire PCP’s transdermal, topical, cosmetic, and nutraceutical business. The stated consideration was $6.0 million in 608,519 shares plus a $1.5 million promissory note, due within 12 months or after a specified financing. The parties waived a pre-closing audit condition; closing conditions and escrow arrangements remained relevant.
- Two lawsuits relate to a disputed prior acquisition. The Florida appellate court reversed dismissal of Nutriband’s complaint in March 2020, and a separate securities-fraud case advanced to discovery after a motion to dismiss was denied in July 2020. No trial date was reported for the latter case.
- Management concluded disclosure controls were ineffective and reported material weaknesses involving segregation of duties and insufficient qualified accounting personnel. It said financial constraints made near-term remediation unlikely.
Important facts for investors to verify
- Available cash, near-term funding requirements, and whether financing sufficient to continue operations and restart development can be secured.
- Status and completion conditions of the PCP acquisition, including the audit, share issuance, and $1.5 million note obligations.
- Regulatory status and actual sales prospects for the South Korean distributor and the company’s pharmaceutical pipeline.
- Outstanding debt balances and terms, and the dilution implications of issued shares and warrants.
- Resolution and potential financial effects of the disclosed litigation, and remediation of material weaknesses in financial controls.
- Reconcile filing inconsistencies: working capital deficiency, operating cash used ($313,652 in the cash-flow statement versus $313,562 in MD&A), and deferred revenue ($29,725 in the financial statements versus $27,725 in MD&A).