Nutriband Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended October 31, 2018. Unaudited consolidated results. The company acquired 4P Therapeutics on August 1, 2018, so its operations are included only from that date.
Business context
Nutriband shifted its principal focus from consumer transdermal patches to developing pharmaceutical products through 4P Therapeutics. Its lead candidate is an abuse-deterrent fentanyl transdermal system; 4P’s products are preclinical and require development and FDA approval before commercialization. The company reported no revenue before the quarter ended October 31, 2018.
Financial highlights
| Metric | Three months ended Oct. 31, 2018 | Nine months ended Oct. 31, 2018 | Comparable 2017 period |
|---|---|---|---|
| Revenue | $162,815 | $162,815 | $0 |
| Cost of sales | $206,283 | $206,283 | $0 |
| Gross profit (loss) | $(43,468) | $(43,468) | $0 |
| Operating expenses | $651,435 | $2,978,305 | $107,732 / $236,311 |
| Net loss | $(488,620) | $(2,815,490) | $(107,732) / $(236,311) |
| Basic and diluted loss per share | $(0.02) | $(0.13) | $(0.01) / $(0.01) |
Revenue comprised $113,815 from research and development services and $49,000 from sales of consumer patches to a South Korean distributor. Gross margin was negative: cost of sales exceeded revenue by $43,468. Nine-month stock-based compensation was $1,763,950, compared with $32,500 in 2017.
- Cash flow: Net cash used in operating activities was $822,572 for the nine months, versus $81,463 in 2017. Investing activities used $404,163, primarily the $400,000 cash payment for 4P. Financing activities provided $1,483,880, mainly from a $1 million stock sale and $500,000 warrant exercise.
- Liquidity: Cash was $257,545 at October 31, 2018; working capital was $225,726. Current assets were $426,817 and current liabilities were $201,091.
- Debt: Notes payable were $40,000, interest-free and due on demand. Related-party advances and the prior council loan had been repaid.
- Balance sheet: Total assets were $2,621,453, including $2,096,250 of net intangible assets from the 4P acquisition. Stockholders’ equity was $2,420,362. Common shares outstanding were 21,824,100 at October 31, 2018.
Changes, outlook and risks
- Year-to-date losses and operating cash use increased materially versus 2017, reflecting the business transition, higher legal and payroll costs, and substantial stock compensation. The 2018 revenue was newly generated; the comparative 2017 periods had none.
- Management estimated a need for up to $2 million for the next 12 months and $5 million for fentanyl-product research and development, including clinical manufacturing and trials, over several years. It said additional financing would be necessary and could not be assured on reasonable terms.
- The filing states that recurring losses, limited revenue, substantial funding needs, and the need for FDA approval raise substantial doubt about the company’s ability to continue as a going concern. Management reported a $500,000 stock sale in November 2018 intended in part to support fentanyl-system development.
- Manufacturing delays and added costs for the South Korean patch order were attributed to foil-component supply problems associated with new U.S. tariffs on Chinese imports.
- The 4P acquisition consideration was $2.25 million: $1.85 million in shares and $400,000 cash, plus a 6% royalty on revenue from its abuse-deterrent intellectual property. The purchase-price allocation was provisional; acquired intangible assets were being amortized over 10 years.
- The company and two officers received an SEC Wells notice concerning disclosures about FDA requirements for consumer patches. Settlement discussions were underway; the filing did not report a final resolution.
- The company was pursuing litigation to rescind its prior Advanced Health Brands acquisition and recover shares; court motions remained unresolved. One defendant returned 200,000 shares in November 2018.
- A previously announced acquisition agreement with Carmel Biosciences was terminated on November 19, 2018, without obligations to either party. On November 23, Nutriband sold 71,429 shares for $500,000.
- Management concluded disclosure controls and procedures were not effective. It reported no material changes to internal controls during the quarter.
Key facts for investors to verify
- Whether Nutriband can raise the additional capital needed to fund operations and product development, and its resulting dilution or financing terms.
- Regulatory and development progress, costs, and timeline for the fentanyl candidate; no FDA approval or commercial product is reported.
- Resolution and potential consequences of the SEC investigation and Advanced Health Brands litigation.
- Final valuation and recoverability of 4P’s acquired intangible assets, and the scope and effect of the 6% royalty.
- Cash-flow presentation differs within the filing: the cash-flow statement reports operating cash use of $822,572, while MD&A cites approximately $822,752 in one passage and $822,752/$822,572 elsewhere. Confirm the correct figure against the filed financial statements.