Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
Our primary business is the development of a portfolio
of transdermal pharmaceutical products. Our lead product is our abuse deterrent fentanyl transdermal system which we are developing 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 help combat the opioid crisis by deterring the abuse and misuse of fentanyl
patches. 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 additional transdermal prescription
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™ transdermal abuse deterrent technology. In addition, we are developing a portfolio of transdermal pharmaceutical
products to deliver commercially available drugs or biologics that are typically delivered by injection but with the potential to improve
compliance and therapeutic outcomes.
We are proceeding with our development efforts
with respect to these products and to performing contract services for a small number of customers. Because of both our financial position
and the effects of the COVID-19 pandemic, our contract service business has also been scaled back. The description of our business in
this annual report is based on our ability to raise significant financing or enter into a joint venture agreement with a third party that
has the financial ability to fund the joint venture’s operations. We cannot assure you that we will be able to obtain necessary
financing or enter into a joint venture agreement on reasonable, if any, terms. If we are not able to continue to obtain financing or
enter into a joint venture agreement, we may not be able to continue in business.
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Through July 31, 2018, our business was the development of a line of
consumer and health products that are delivered through a transdermal or topical patch. Consumer products are products that are sold over
the counter and do not require a prescription. Most of our 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 Pocono, our focus is primarily now on providing contract manufacturing services and consulting services to
3 rd party brands with no intention at this time to launch our own consumer products.
With our acquisition of 4P Therapeutics on August
1, 2018, our focus changed, and we are seeking to develop and seek FDA approval on a number of transdermal pharmaceutical products under
development by 4P Therapeutics. As a result of the acquisition of 4P Therapeutics, we have pipeline of potential 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 a negative gross margin. We have no long-term contractual obligations, and either
party can terminate at any time.
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 have budgeted $5.0
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 March 25, 2020, we completed a private placement
of 46,828 units at a price of $11 per unit. Each unit consisted of one share of common stock and a warrant to purchase one share of common
stock at an exercise price of $14 per share. The warrants expire April 30, 2023. We issued a total of 46,828 shares of common stock and
warrants to purchase 46,828 shares of common stock. We received proceeds of $515,113.
On March 25, 2020, w e paid off the convertible
notes in the principal amount of $270,000 from the proceeds of the private placement. The total payments, including the prepayment penalty
and accrued interest, was $345,656. The payment was made from the proceeds of the private placement. As a result of the payment of the
notes, the derivative liability, which was $928,774 at July 31, 2020, was reduced to zero. As a result of a completed private placement,
the warrants to purchase 50,000 shares at the lesser of (i) $20.90 or, (ii) if the Company completes its public offering of its common
stock, 110% of the initial public offering price of the Common Stock in the public offering, became a warrant to purchase 95,000 warrants
at $11 per share, subject to adjustment pursuant to the antidilution provisions of the warrant. The Company recorded a derivative liability
for the warrants in the amount of $906,678 and reclassed the derivative liability to additional paid-in capital as of January 31, 2021.
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In March 2020, a minority stockholder who had
previously made loans to us in the total amount of $215,00, made an additional loan to us in the amount of $60,000, increasing the total
loans from the stockholder to $275,000. On March 27, 2020, we issued 25,000 shares of common stock upon conversion of the notes.
Pursuant to a Stock Purchase Agreement (“SPA”),
dated December 7, 2020, with the Company, BPM Inno Ltd., Kiryat, Israel, purchased 81,396 shares of common stock at a price of $8.60 per
share, or $700,000, which provided payment for the RamBam license. The transaction was completed at a closing on February 26, 2021.
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 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
1,056,000 (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 $6.25 per Unit. Each Warrant is immediately exercisable, will entitle the holder to purchase
one share of common stock at an exercise price of $7.50 and will expire five (5) years from the date of issuance. The underwriters’
over-allotment option was exercised for 158,400 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 January
3, 2022, 392,396 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 350,000 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 350,000 shares of common stock reserved for issuance under the Plan. On January 21, 2022, the Board approved
options to purchase 163,500 shares of the Company’s common stock issued to executive officers and directors of the Company at a
price of $4.85 ($5.34 per share for two of the officers as required by IRS rules).
Years Ended January 31, 2022 and 2021
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. For the year ended January 31, 2021, we generated revenue
of $943,702 and our costs of revenue were $627,378, resulting in a gross margin of $316,324. Our revenue for January 31, 2022 was derived
from three sources – (1) a continuation of research and development contracts of the type 4P Therapeutics performed prior to our
acquisition, which accounted for $242,354, (2) sales of our consumer transdermal product to or South Korean distributor, which accounted
for $86,600 which our distributor purchased for its preliminary marketing efforts since the product has not obtained regulatory approval
for retail sales in South Korea and (3) sales from our recent acquisition of transdermal patches, which accounted for $1,093,200. Since
we do not have the funds for development of our lead product, the 4P Therapeutics fixed costs are allocated to the contract services that
we perform for clients. Our cost of revenue for our contract research and development services represents basically our labor cost plus
a modest amount of material costs which we passed on to the client. The Company moved from the 4P facilities, and many of the prior costs
relating to the facility were not incurred.
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For the year ended January 31, 2022, our selling, general and administrative
expenses were $4,022,824, primarily legal, accounting, administrative salaries and non-cash expenses of $1,364,732, compared to $2,912,269
for the year ended January 31, 2021.The increase from 2021 is primarily attributable to non-cash consulting expenses of $1,364,732, and
the inclusion of expenses of $668,661 of Active Intelligence in 2022.
During the year ended January 31, 2022, the Company recorded an impairment
expense of $2,180,836 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, 2022, the Company
commenced research and development expenses on its Aversa product and incurred $144,000 of salary liabilities that were paid with the
issuance of common stock and other expenses of $267,303.
During the year ended January 31, 2021, we incurred
gain on change in fair value of derivatives of $22,096 in connection with our October 2019 financing in which we raised gross proceeds
of $250,000 and net proceeds of approximately $230,000 from the sale of convertible notes and warrants. 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.
We incurred interest expense of $118,421, primarily
from the amortization of debt discounts for the Year ended January 31, 2022, as compared to $280,686 for the year ended January 31, 2021.
As a result of the foregoing, we sustained a net
loss of $6,372,715, or $(0.94) per share (basic and diluted) for the year ended January 31, 2022, compared with a loss of $2,932,828,
or $(0.51) per share (basic and diluted) for the year ended January 31, 2021. 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, 2022, we had $4,891,868 in cash and cash equivalents
and working capital of $4,686,112, as compared with cash and cash equivalents of $151,993 and working capital deficiency of $2,254,418
as of January 31, 2021. 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, 2022, we used cash
of $2,809,223 in our operations. The principal adjustments to our net loss of $6,176,126 were amortization of debt discount of $97,477,
depreciation and amortization of $308,741, and stock-based compensation of $1,314,401, and goodwill impairment of $2,180,836, offset by
a gain on extinguishment of debt of $53,028.
For the year ended January 31, 2022, we used cash in investing activities
of $81,595 primarily for the purchase of equipment. During the year ended January 31, 2021, cash received from acquisition amounted to
$66,964.
For the year ended January 31, 2022, we had cash flows of $7,630,721
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.
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Critical Accounting Policies
Going Concern
As of January 31, 2022,
the Company believes the substantial doubt about its status as a going concern has been resolved. The going concern conditions that caused
substantial doubt no longer exist as the Company has positive cash flow during the year ended and as of January 31, 2022 and has positive
working capital as of January 31, 2022. In October 2021, the Company consummated a public offering and received net proceeds of $5,836,230.
The Company also received $2,942,970 of proceeds from the exercise of warrants. Management retired most of its debt and other current
obligations. Management has implemented other plans to alleviate the substantial doubt. These plans include a substantial increase in
projected sales commitments. These factors did not exist in prior years during its start-up operations. The Company’s recent history
of losses has continued but future positive cash flow projections due to its management’s plans which includes its acquisition in
the latter part of 2020 will enable the Company to alleviate the substantial doubt about the Company’s ability to continue as a
going concern. Management’s plans have been currently implemented. The plans enable the Company to meet its obligations for at least
one year from the date when the financial statements are issued.
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. We adopted the guidance under the new revenue standards using the modified retrospective method
effective February 1, 2018. Topic 606 requires us to recognize revenues when control of the promised goods or services and receipt of
payment is probable. 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.
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.
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, 2022 and 2021, the
Company recorded no bad debt expense for doubtful accounts related to account receivable.
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.
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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 PCP Assets and Active Intelligence , the Company recorded Goodwill of $5,810,640. During the year ended January 31, 2022,
the Company recorded an impairment charge of $2,180,836 reducing the PCP Assets and Active Intelligence goodwill to $3,629,813. The write
down of goodwill is attributable primarily to the effect of the pandemic. Covid-19, unmet sales expectations, and other factors the Company
determined resulted in the impairment. The valuation of the reporting unit does not exceed the carrying amount of goodwill using the value
in use or the going concern premise. As of January 31, 2022 and 2021, goodwill amounted to $5,349,039 and $7,529,875, 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.
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, 2022, and 2021, there were 1,288,432 and 141,830 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We are a smaller reporting company as defined
by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
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