The following discussion and analysis of financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this report. This discussion
contains forward-looking statements that involve risks, uncertainties and
assumptions. See "Note Regarding Forward-Looking Statements." Our actual results
could differ materially from those anticipated in the forward-looking statements
as a result of certain factors discussed in "Risk Factors" and elsewhere in this
report.
It should be noted that current public health threats could adversely affect our
ongoing or planned business operations. In particular, the novel coronavirus
(COVID-19) has resulted in quarantines, restrictions on travel and other
business and economic disruptions. We cannot presently predict the scope and
severity of any potential business shutdowns or disruptions, but if we or any of
the third parties with whom we engage, including the partners and other third
parties with whom we conduct business, were to experience shutdowns or other
business disruptions, our ability to conduct our business in the manner and on
the timelines presently planned could be materially and adversely impacted. The
measures being taken by service providers and government agencies to suppress
the spread of COVID-19 infection may delay time to production of our planned
abuse deterrent fentanyl transdermal system product and therefor delay the time
of filing with FDA for approval.
Overview
AVERSA™ transdermal abuse deterrent technology.
Our primary business is the development of a portfolio of transdermal
pharmaceutical products. Our lead product is our abuse deterrent fentanyl
transdermal system which will require approval from the Food and Drug
Administration ("FDA") and substantial additional capital for research and
development. Our abuse deterrent transdermal product under development has the
potential to provide clinicians and patients with an extended-release
transdermal fentanyl product for use in managing chronic pain requiring around
the clock opioid therapy combined with properties designed to deter the abuse
and misuse of fentanyl patches. In addition, we believe that our abuse deterrent
technology can be broadly applied to various transdermal products and our
strategy is to follow the development of our abuse deterrent fentanyl
transdermal system with the development of abuse deterrent transdermal products
for pharmaceuticals that have risks or a history of abuse. We received on
January 28, 2022 an Issue Notification from the United States Patent and
Trademark Office (USPTO) for its United States patent entitled, "Abuse and
Misuse Deterrent Transdermal System," that protects our Aversa™ technology
platform.
Transdermal Pharmaceutical Products
Through October 31, 2018, our business was the development of a line of consumer
and health products that are delivered through a transdermal or topical patch.
Following our acquisition of 4P Therapeutics on August 1, 2018, our focus
expanded to include prescription pharmaceuticals, and we are seeking to develop
and seek FDA approval on a number of transdermal pharmaceutical products under
development by 4P Therapeutics.
Most of our planned consumer products require FDA approval for sale in the
United States, and we have not sought to obtain, and we do not plan to seek to
obtain, FDA approval to market these products in the United States at this time.
Following our acquisition of selected assets from Pocono Coated Products, LLC
("Pocono"), we are primarily focused on providing contract manufacturing
services and consulting services to 3rd party brands with no intention at this
time to launch our own consumer products.
4P Therapeutics has not generated any revenue from any of its products under
development. Rather, prior to our acquisition, 4P Therapeutics generated revenue
to provide cash for its operations through contract research and development and
related services for a small number of clients in the life sciences field on an
as-needed basis. We are, for the near term, continuing this activity, although
we do not anticipate that it will generate significant revenues and, since our
acquisition, it has generated minor gross margins. We have no long-term
contractual obligations, and either party can terminate at any time.
26
With the change in our focus, our capital requirements have increased
substantially. The process of developing pharmaceutical products and submitting
them for FDA approval is both time consuming and expensive, with no assurance of
obtaining approval from the FDA to market our product in the United States. We
will require approximately $13 million for research and development of our abuse
deterrent fentanyl transdermal system, including clinical manufacturing and
clinical trials that need to be completed in order to obtain FDA approval.
However, the total cost could be substantially in excess of that amount.
On August 31, 2020, the Company entered into a Purchase Agreement ("Agreement"),
with Pocono Coated Products ("PCP"), pursuant to which PCP agreed to sell the
Company all of the assets associated with its Transdermal, Topical, Cosmetic and
Nutraceutical business (the "Assets"). PCP is the manufacturer of our
transdermal consumer products, and we bought that business from them. The
purchase price for the Assets was (i) $6,000,000 paid in shares of the Company's
common stock at a value of the average price of the previous 90 days at the date
of Closing (the "Shares"); (ii) a promissory note of the Company in the
principal amount of $1,500,000, which is due upon the earlier of (a) twelve (12)
months from issuance, or (b) immediately following a capital raise of no less
than $4,000,000 and/or a public offering of no less than $4,000,000. The note
was repaid in full in October 2021. Subsequent to the repayment of the note, the
Shares were released from escrow.
On October 5, 2021, the Company, having been approved for the listing of its
common stock on The Nasdaq Capital Market effective October 1, 2021, consummated
a public offering (the "IPO") of units (the "Units"), of common stock and
warrants that were offered in the IPO on The Nasdaq Capital Market, which
included 1,231,200 (each a "Unit"), each Unit consisting of one share of common
stock, par value $0.001 per share, and one warrant (each a "Warrant") at a price
of $5.36 per Unit. Each Warrant is immediately exercisable, will entitle the
holder to purchase one share of common stock at an exercise price of $6.43 and
will expire five (5) years from the date of issuance. The underwriters'
over-allotment option was exercised for 184,800 warrants to purchase shares of
common stock bringing to total net proceeds to the Company from the IPO to
$5,836,230. The shares of common stock and Warrants are separately transferred
immediately upon issuance. As of October 31, 2022, 457,795 Warrants issued in
the IPO have been exercised, with net proceeds to the Company of $2,942,970.
On November 1, 2021, The Board of Directors adopted the 2021 Employee Stock
Option Plan (the "Plan"). The Company has reserved 408,333 shares to issue and
sell upon the exercise of stock options issued under the Plan. On November 3,
2021, the Company filed a Registration Statement on Form S-8, to register under
the Securities Act of 1933, as amended, the 408,333 shares of common stock
reserved for issuance under the Plan, and on October 12, 2022, a Post-Effective
Amendment to the Form S-8 was filed with the SEC. On January 21, 2022, the Board
approved options to purchase 190,751 shares of the Company's common stock under
the Plan issued to executive officers and directors of the Company at an
exercise price of $4.16 ($4.58 per share for two of the officers as required by
IRS rules). On August 1, 2022, the Board approved option grants previously
approved by the Compensation Committee for an aggregate of 137,084 shares of
common stock at exercise prices $4.09 or $4.50 per share depending on IRS rules
as applicable to the recipient,, and on September 30, 2022, approved option
issuances under the Plan for an aggregate of 35,000 shares of common stock at an
exercise price of $3.59 per share for services provided by the independent
directors, as previously approved by the Compensation Committee.
The Company received a favorable verdict on July 13, 2022 from the Circuit
Court, Orange County, Florida, providing for rescission of the Company's 2017
acquisition of Advanced Health Brands and recovery by the Company of the
1,400,000 shares(adjusted for a 1-for-4 reverse stock split effective June 23,
2019 and the 7-for-six forward stock split effective August 15, 2022) of common
stock issued in the acquisition, effectively allowing the Company on July 25,
2022 to cancel 1.4M shares of common stock held by the defendants.
On October 31, 2022, the Company filed the Proxy Statement with the SEC for its
Annual Meeting of Stockholders, to be held December 9, 2022, in Orlando,
Florida. This Proxy Statement is available on our website
at HTTPS://Nutriband.com/proxy.
Forward Split of our Common Stock.
On July 26, 2022, our Board of Directors approved the amendment to our Articles
of Incorporation to effect a 7 for 6 forward stock split (the "Stock Split") of
our outstanding common stock. We filed the amendment set forth in a Certificate
of Change with the Secretary of State of Nevada on August 4, 2022. The 7:6
forward split was effective for trading purposes on the Nasdaq Capital Market on
August 12, 2022. Each shareholder of record as of the August 15, 2022 record
date received one (1) additional share of common stock for each six (6) shares
held as of the record date. No fractional shares of common stock were issued in
connection with the Stock Split. Instead, all shares were rounded up to the next
whole share. In connection with the Stock Split, which did not require
shareholder approval under the Nevada corporation law, the number of authorized
shares of common stock of the Company was increased in the same ratio as the
shares of outstanding common stock were increased in the Stock Split, from
250,000,000 authorized shares to 291,666,666 authorized shares.
27
Years Ended January 31, 2023 and 2022
For the year ended January 31, 2023, we generated revenue of $2,079,609 and our
costs of revenue were $1,329,200, resulting in a gross margin of $750,409. For
the year ended January 31, 2022, we generated revenue of $1,422,154 and our
costs of revenue were $917,844, resulting in a gross margin of $504,310 in the
subsequent year. Our revenue for the year ended January 31, 2023, was derived
from sales of $1,785,507 from our transdermal patch manufacturing segment and
$294,102 from contract services from our 4P Therapeutics segment. The increase
in revenue of $657,455 from the transdermal patch manufacturing segment is
primarily due to an increase in demand which has continued in the subsequent
year. The transdermal patch manufacturing segment increased its margin by 3%
during the period. Our cost of revenue for our contract research and
development services represents our labor cost plus a modest amount of material
costs which we passed on to the client. Our sales and cost of sales remained
constant for our contract services compared to the prior year.
For the year ended January 31, 2023, our selling, general and administrative
expenses were $3,916,041, primarily legal, accounting, administrative salaries
and equity-based payments, compared to $4,022,824 for the year ended January 31,
2022. The amount remained relatively constant for the prior year.
During the years ended January 31, 2023 and 2022, the Company recorded an
impairment expense of $327,326 and $2,180,836, respectively, due to a write down
of Goodwill in connection with its Pocono acquisition. The write down of
goodwill is attributable primarily to the effects of the pandemic. The valuation
of the reporting unit does not exceed the carrying amount of goodwill using the
value in use or the going concern premise.
During the year January 31, 2023, the Company incurred research and development
expenses on its Aversa Fentanyl product of $982,227, primarily of salaries and
development costs from Kindeva as compared to $411,383 for the year ended
January 31, 2022.
During the year ended January 31, 2022, the Company incurred a gain on
extinguishment of debt of $53,028, consisting primarily of forgiveness of a PPP
loan. There was no gain on extinguishment of debt during the year ended January
31, 2023.
We incurred interest expense of $8,289 for the year ended January 31, 2023, as
compared to $118,421 for the year ended January 31, 2022, primarily from the
amortization of debt discounts.
As a result of the foregoing, we sustained a net loss of $4,483,474, or $(0.53)
per share (basic and diluted) for the year ended January 31, 2023, compared with
a loss of $6,372,715, or $(0.80) per share (basic and diluted) for the year
ended January 31, 2022. The net loss for 2022 includes a deemed dividend of
$196,589 from the settlement of a warrant round down.
Liquidity and Capital Resources
As of January 31, 2023, we had $1,985,440 in cash and cash equivalents and
working capital of $1,945,132, as compared with cash and cash equivalents of
$4,891,868 and working capital of $4,686,112 as of January 31, 2022. The Company
received proceeds of approximately $8.8 million from the completion of its
public offering, exercise of warrants and the sale of common stock during the
year ended January 31, 2022.
For the year ended January 31, 2023, we used cash of $2,987,198 in our
operations. The principal adjustments to our net loss of $4,483,474 were
depreciation and amortization of $330,143, and stock-based compensation of
$1,019,310, and goodwill impairment of $327,326.
For the year ended January 31, 2023, we used cash in investing activities of
$79,304 primarily for the purchase of equipment.
For the year ended January 31, 2023, we provided cash in financing activities of
$160,074, primarily from the proceeds of $296,875 from the exercise of warrants,
offset from the purchase of treasury stock of $119,006. For the year ended
January 31, 2022, we had cash flows of $7,630,693 from financing activities,
primarily $9.4 million from the completion of our public offering, exercise of
warrants, and gross proceeds from the sale of common stock offset by a payment
on long-term debt of $1.5 million and the repurchase of treasury stock.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future material effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
28
Critical Accounting Policies
Forward Stock Split
On July 26, 2022, our Board of Directors approved the amendment to our Articles
of Incorporation to effect a 7 for 6 forward stock split (the "Stock Split") of
our outstanding common stock. The Company filed the amendment set forth in a
Certificate of Change with the Secretary of State of Nevada on August 4, 2022.
The 7:6 forward stock split was effective for trading purposes on the Nasdaq
Capital Market on August 12, 2022. Each shareholder of record as of the August
15, 2022 record date received one (1) additional share for each six (6) shares
held as of the record date. No fractional shares of common stock were issued in
connection with the Stock Split. Instead, all shares were rounded up to the next
whole share. In connection with the Stock Split, which did not require
shareholder approval under the Nevada corporation law, the number of shares of
common stock of the Company was increased in the same ratio as the shares of
outstanding common stock were increased in the Stock Split, from 250,000,000
authorized shares to 291,666,666 authorized shares.
All share and per share information in these financial statements retroactively
reflect the forward stock split.
Going Concern Assessment
Management assesses liquidity and going concern uncertainty in the Company's
condensed financial statements to determine whether there is sufficient cash on
hand and working capital, including available borrowings on loans, to operate
for a period of at least one year from the date the consolidated financial
statements are issued or available to be issued, which is referred to as the
"look-forward period", as defined in GAAP. As part of this assessment, based on
conditions that are known and reasonably knowable to management, management will
consider various scenarios, forecasts, projections, estimates and will make
certain key assumptions, including timing and nature of projected cash
expenditures or programs, its ability to delay or curtail expenditures or
programs and its ability to raise additional capital, if necessary, among other
factors. Based on this assessment, as necessary or applicable, management makes
certain assumptions around implementing curtailments or delays in the nature and
timing of programs and expenditures to the extent it deems probable those
implementations can be achieved and management has the proper authority to
execute them within the look-forward period.
As of January 31, 2023, the Company had cash and cash equivalents of $1,985,440
and working capital of $1,945,132. For the year ended January 31, 2023, the
Company incurred an operating loss of $4,483,474 and used cash flow from
operations of $2,987,198. The Company has generated operating losses since its
inception and has relied on sales of securities and issuance of third-party and
related-party debt to support cash flow from operations. In October 2021, the
Company consummated a public offering and received net proceeds of $5,836,230.
The Company also received to date $2,942,970 proceeds from the exercise of
warrants. The Company has used these proceeds to fund operations and will
continue to use the funds as needed. In March 2023, the Company entered into a
three-year $2,000,000 Creditline Note facility for $2 million which will permit
the Company to draw on the credit line to fund the Company's research and
development of its Aversa Fentanyl product.
Management has prepared estimates of operations for the next twelve months and
believes that sufficient funds will be generated from operations to fund its
operations for one year from the date of the filing of these condensed
consolidated financial statements, which indicates improved operations and the
Company's ability to continue operations as a going concern. The impact of
COVID-19 on the Company's business has been considered in these assumptions;
however, it is too early to know the full impact of COVID-19 or its timing on a
return to normal operations.
Management believes the substantial doubt about the ability of the Company to
continue as a going concern is alleviated by the above assessment.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Company to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, the Company evaluates
its estimates including, but not limited to, those related to such items as
income tax exposures, accruals, depreciable/useful lives, allowance for doubtful
accounts and valuation allowances. The Company bases its estimates on historical
experience and on other various assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results could differ from those
estimates.
29
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with
Customers (Topic 606) ("ASU 2014-09"), which amends the accounting standards for
revenue recognition. ASU 2014-09 is based on principles that govern the
recognition of revenue at an amount an entity expects to be entitled when
products are transferred to a customer. The Company recognizes revenue based on
the five criteria for revenue recognition established under Topic 606: 1)
identify the contract, 2) identify separate performance obligations, 3)
determine the transaction price, 4) allocate the transaction price among the
performance obligations, and 5) recognize revenue as the performance obligations
are satisfied.
Accounts Receivable Trade accounts receivables are recorded at the net invoice
value and are not interest bearing. The Company maintains allowances for
doubtful accounts for estimated losses from the inability of its customers to
make required payments. The Company determines its allowances by both specific
identification of customer accounts where appropriate and the application of
historical loss to non-applicable accounts. For the years ended January 31, 2023
and 2022, the Company recorded no bad debt expense for doubtful accounts related
to account receivable.
Inventories
Inventories are valued at the lower of cost and reasonable value determined
using the first-in, first-out (FIFO) method. Net realized value is the estimated
selling price in the ordinary course of business, less applicable variable
selling expenses. The cost of finished goods and work in process is comprised of
material costs, direct labor costs and other direct costs and related production
overheads (based on normal operating capacity). As of January 31, 2023 and 2022,
100% of the inventory consists of raw materials.
Intangible Assets
Intangible assets include trademarks, intellectual property and customer base
acquired through business combinations. The Company accounts for Other
Intangible Assets under the guidance of ASC 350, "Intangibles-Goodwill and
Other." The Company capitalizes certain costs related to patent technology. A
substantial component of the purchase price related to the Company's
acquisitions have also been assigned to intellectual property and other
intangibles. Under the guidance, other intangible assets with definite lives are
amortized over their estimated useful lives. Intangible assets with indefinite
lives are tested annually for impairment. Trademarks, intellectual property and
customer base are being amortized over their estimated useful lives of ten
years.
Goodwill
Goodwill represents the difference between the total purchase price and the fair
value of assets (tangible and intangible) and liabilities at the date of
acquisition. Goodwill is reviewed for impairment annually on January 31, and
more frequently as circumstances warrant, and written down only in the period in
which the recorded value of such assets exceeds their fair value. The Company
does not amortize goodwill in accordance with ASC 350. In connection with the
Company's acquisition of 4P Therapeutics LLC in 2018, the Company recorded
Goodwill of $1,719,235. On August 31, 2020, in connection with the Company's
acquisition of Pocono Coated Products LLC and Active Intelligence LLC, the
Company recorded Goodwill of $5,810,640. During the years ended January 31, 2023
and 2022, the Company recorded an impairment charge of $327,326 and $2,180,836,
respectively, reducing the Active Intelligence LLC Goodwill to $3,302,478. As of
January 31, 2023 and 2022, Goodwill amounted to $5,021,713 and $5,349,039,
respectively.
Long-lived Assets
Management reviews long-lived assets for potential impairment whenever
significant events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. An impairment exists when the carrying
amount of the long-lived asset is not recoverable and exceeds its fair value.
The carrying amount of a long-lived asset is not recoverable if it exceeds the
sum of the estimated undiscounted cash flows expected to result from the use and
eventual disposition of the asset. If an impairment exists, the resulting
write-down would be the difference between the fair market value of the
long-lived asset and the related book value.
30
Earnings per Share
Basic earnings per share of common stock is computed by dividing net earnings by
the weighted average number of shares of common stock outstanding during the
period. Diluted earnings per share is computed by dividing net earnings by the
weighted average number of shares of common stock and potential shares of common
stock outstanding during the period. Potential shares of common stock consist of
shares issuable upon the exercise of outstanding options and common stock
purchase warrants. As of January 31, 2023, and 2022, there were 1,778,006 and
1,503,171 common stock equivalents outstanding, that were not included in the
calculation of dilutive earnings per share as their effect would be
anti-dilutive.
Stock-Based Compensation
ASC 718, "Compensation - Stock Compensation," prescribes accounting and
reporting standards for all share-based payment transactions in which employee
services, and, since February 1, 2019, non-employees, are acquired. Transactions
include incurring liabilities, or issuing or offering to issue shares, options
and other equity instruments such as employee stock ownership plans and stock
appreciation rights. Share-based payments to employees, including grants of
employee stock options, are recognized as compensation expense in the financial
statements based on their fair values. That expense is recognized over the
period during which an employee is required to provide services in exchange for
the award, known as the requisite service period (usually the vesting period).
As of February 1, 2019, pursuant to ASC 2018-07, ASC 718 was applied to
stock-based compensation for both employees and non-employees.
Research and Development Expenses
Research and development costs are expensed as incurred.
Income Taxes
Taxes are calculated in accordance with taxation principles currently effective
in the United States and Ireland.
The Company accounts for income taxes under the asset and liability method,
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements. Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial statements and tax
basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. The effect of a change in tax
rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.
The Company records net deferred tax assets to the extent they believe these
assets will more-likely-than-not be realized. In making such determination, the
Company considers all available positive and negative evidence, including future
reversals of existing taxable temporary differences, projected future taxable
income, tax planning strategies and recent financial operations. In the event
the Company was to determine that it would be able to realize its deferred
income tax assets in the future in excess of its net recorded amount, the
Company would make an adjustment to the valuation allowance which would reduce
the provision for income taxes.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash. The Company's cash and cash equivalents
are concentrated primarily in banks. At times, such deposits could be in excess
of insured limits. Management believes that the financial institutions that hold
the Company's financial instruments are financially sound and, accordingly,
minimal credit risk is believed to exist with respect to those financial
interests. As of and for the year ended January 31, 2023, two customers
accounted for 34% and 14% of the Company's revenue and one customer accounted
for 94% of accounts receivable. As of and for the year ended January 31, 2022,
three customers accounted for 19%, 17% and 13% of the Company's revenue and
three customers accounted for 58%, 21% and 17% of accounts receivable.
© Edgar Online, source Glimpses
NUTRIBAND INC. 
