Nutriband Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended October 31, 2019. Filed December 12, 2019. Amounts are in U.S. dollars.
Business context
Nutriband is developing transdermal pharmaceutical products, including an abuse-deterrent fentanyl patch acquired through 4P Therapeutics. The pipeline is preclinical; products require development and FDA approval before commercialization. Current revenue comes from contract research and development services and sales of consumer patches to a South Korean distributor. The company said it did not expect significant distributor revenue for the year ending January 31, 2020 while regulatory clearance remained pending.
Financial performance
| Metric | Three months ended Oct. 31, 2019 | Three months ended Oct. 31, 2018 | Nine months ended Oct. 31, 2019 | Nine months ended Oct. 31, 2018 |
|---|---|---|---|---|
| Revenue | $82,567 | $162,815 | $351,070 | $162,815 |
| Cost of revenue | $106,126 | $206,283 | $422,879 | $206,283 |
| Gross profit (loss) | $(23,559) | $(43,468) | $(71,809) | $(43,468) |
| Operating expenses, SG&A | $307,015 | $445,152 | $1,281,538 | $2,772,022 |
| Loss from operations | $(330,574) | $(488,620) | $(1,353,347) | $(2,815,490) |
| Net loss | $(753,274) | $(488,620) | $(1,777,192) | $(2,815,490) |
| Basic and diluted loss per share | $(0.14) | $(0.09) | $(0.33) | $(0.53) |
Third-quarter revenue fell about 49% year over year; revenue was entirely from research and development services, with no consumer-patch sales in the quarter. Nine-month revenue increased versus 2018, partly reflecting the inclusion of 4P Therapeutics after its August 2018 acquisition. Nine-month SG&A declined, mainly because of lower payroll-related expense, partly offset by higher legal costs. The nine-month net loss improved year over year, while third-quarter net loss increased, reflecting $352,136 of derivative expense and a $70,150 loss on derivative fair-value changes in connection with the October financing.
Cash, liquidity and debt
- Cash was $97,470 at October 31, 2019, down from $474,653 at January 31, 2019. Working capital was a deficit of $1,104,124, versus positive working capital of $187,460 at January 31.
- Operating activities used $776,931 cash in the first nine months of 2019. Investing activities used no cash; financing activities provided $400,000. Ending cash was $97,470.
- Current liabilities totaled $1,367,500, including $683,742 of accounts payable and accrued expenses, $190,000 of interest-free notes payable due on demand, and a $478,852 derivative liability. Stockholders’ equity was $1,073,302.
- In October, the company issued one-year, 6% convertible notes with $270,000 principal and warrants for 50,000 shares. Gross proceeds were $250,000 and net proceeds approximately $203,000. The notes have variable conversion terms, including a conversion price tied to 70% of the lowest trading price over a specified 20-day period, and contain financing-triggered repayment provisions. A $270,000 debt discount reduced the notes’ reported net carrying amount to zero at quarter-end.
- The note agreement required the company to increase authorized common shares to 250 million by January 28, 2020. The filing reports 25 million authorized common shares and 5,423,956 shares issued and outstanding at October 31, 2019.
Outlook, risks and other material matters
- Management stated that substantial additional financing is needed to execute the business plan and that the company lacked funds to develop its lead product. It budgeted $5.0 million for development, clinical manufacturing and trials for the abuse-deterrent fentanyl system, but warned total costs could be materially higher. A proposed public offering was being pursued; completion and sufficiency of proceeds were not assured.
- The filing states that substantial doubt exists about the company’s ability to continue as a going concern for at least one year after issuance of the financial statements. Profitability depends on financing, sufficient service revenue, product development and FDA approval.
- Management reported a significant decline in revenue from 4P Therapeutics’ largest customer. Nine-month 4P services revenue was $208,620 against $331,411 of related cost of revenue; management noted that fixed costs could continue to produce negative gross margins if revenue is inadequate.
- Convertible-note derivative valuations rely on Level 3, unobservable inputs and a Binomial Model, making reported fair values sensitive to assumptions.
- Legal matters include the company’s dispute over the Advanced Health Brands acquisition and its efforts to recover 1,250,000 shares and seek damages. The Florida court denied defendants’ sanctions and contempt motion on October 29, 2019; related litigation and an appeal remained described in the filing.
- Disclosure controls and procedures were deemed ineffective. Management identified material weaknesses involving lack of segregation of duties, insufficient qualified accounting personnel and reliance on outside consultants, and said financial constraints made near-term remediation unlikely.
- The company adopted lease accounting under ASC 842 in February 2019, recording a right-of-use asset and lease liability of $28,827. Remaining operating lease liability was $14,906 at quarter-end.
Important facts for investors to verify
- Availability, timing and terms of additional financing, including the proposed public offering and whether funds will cover the stated development budget.
- Progress, expected costs and regulatory pathway for the fentanyl product and other pipeline candidates, including milestones needed for FDA approval.
- Whether research-services revenue can recover and cover fixed costs, and whether the South Korean distributor obtains regulatory clearance and places further orders.
- Convertible-note conversion, repayment and dilution implications; compliance with the authorized-share increase requirement; and subsequent changes in the derivative liability.
- Cash runway, payment status of demand notes and accrued liabilities, and progress in addressing the disclosed internal-control weaknesses.
- Developments in the Advanced Health Brands litigation and any potential financial or share-related effects.