NutriBand Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements. Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended January 31, 2023, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and information contained in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects. 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 our United States patent entitled, “Abuse and Misuse Deterrent Transdermal System,” that protects our Aversa™ technology platform. 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 3 rd 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. 20 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 to obtain FDA approval. However, the total cost could be substantially in excess of that amount. On August 31, 2020, the Company closed the purchase of all of the assets of Pocono Coated Products (“PCP”) associated with its Transdermal, Topical, Cosmetic and Nutraceutical business (the “Assets”). pursuant to a Purchase Agreement (“Agreement”), entered into on August 31, 2020. 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”); and (ii) a promissory note of the Company in the principal amount of $1,500,000, which note was repaid in full in October 2021. Subsequent to the repayment of the note, on October 25, 2021, 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, entitles 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 were separately transferred immediately upon issuance. As of October 31, 2023, 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. In accordance with the Plan, on February 1, 2022, the Company reserved an additional 233,333 shares and on February 1, 2023, the Company reserved an additional 233,333 shares. 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, 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. On December 8, 2022, the Board approved option grants to executive officers previously approved by the Compensation Committee for an aggregate of 107,500 shares at exercise prices of $3.75 ($4.12 for two of the officers as required by IRS rules). During the nine months ended October 31, 2023, the Board approved option grants to purchase 404,500 shares of common stock at exercise prices of $1.93-$3.975 per share previously approved by the Compensation Committee to executive officers and employees for services. As of October 31, 2023, 166 shares remain in the Plan. See Note 8 for further information. 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 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. On October 31, 2022, the Company filed the Proxy Statement with the SEC for its Annual Meeting of Stockholders, for the election of directors held on December 9, 2022, in Orlando, Florida. This Proxy Statement is available on our website at HTTPS://Nutriband.com/proxy . The Company on July 13, 2023 entered into an amended three-year $5,000,000 credit line facility (replacing the $2,000,000 facility that we had entered into on March 19, 2023), drawdowns under which bear interest at the rate of 7% per annum. The credit line provides the Company with available financing through the FDA approval process and into commercial scale manufacturing, for the Company’s patented lead product, AVERSA™ Fentanyl, an abuse-deterrent fentanyl transdermal system. 21 Results of Operations Three Months Ended October 31, 2023 and 2022 For the three months ended October 31, 2023, we generated revenue of $427,841 and our costs of revenue were $268,920. For the three months ended October 31, 2022, we generated revenue of $618,003 and our costs of revenue were $349,272. Our revenue for October 31, 2023, was derived from sales of $427,841 from our Transdermal Patches segment and $-0- from contract services from our 4P Therapeutics segment. The revenue from the Transdermal Patches segment remained relatively constant from the prior year. An increase in demand continued in the fourth quarter. The Company’s contract with Sorrento Therapeutics was completed and 4P Therapeutics devoted most of its time to the development of its Aversa product, 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 cost of sales decreased during the period for our contract services in comparison to the prior year as our main contract has been completed and the balance of the contract is being recognized with limited additional costs. For the three months ended October 31, 2023, our selling, general and administrative expenses were $1,330,929 primarily legal, accounting and administrative salaries and non-cash compensation from the issuance of employee stock options compared to $1,049,532 for the three months ended October 31, 2022.The increase from 2022 is primarily attributable to increases in non-cash equity-based expenses. During the three months ended October 31, 2023, the Company incurred research and development expenses of its Aversa Fentanyl product of $551,503, primarily of salaries and increases in development costs from Kindeva as compared to $290,718 for the three months ended October 31, 2022. We incurred interest expense of $40,200 for the three months ended October 31, 2023, as compared to $3,966 for the three months ended October 31, 2022. The increase is primarily due to interest in the Company’s related party loans. As a result of the foregoing, we sustained a net loss of $1,759,946 or $(0.22) per share (basic and diluted) for the three months ended October 31, 2023, compared with a loss of $1,075,485, or $(0.14) per share (basic and diluted) for the three months ended October 31, 2022. Nine Months Ended October 31, 2023 and 2022 For the nine months ended October 31, 2023, we generated revenue of $1,560,701 and our costs of revenue were $879,824. For the nine months ended October 31, 2022, we generated revenue of $1,552,074 and our costs of revenue were $931,061. Our revenue for October 31, 2023, was derived from sales of $1,395,701 from our Transdermal Patches segment and $165,034 from contract services from our 4P Therapeutics segment. The revenue from the Transdermal Patches segment increased from the prior year. An increase in demand continued in the subsequent quarter. 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 cost of sales decreased during the period for our contract services in comparison to the prior year as our main contract has been completed and the balance of the contract is being recognized with limited additional costs. For the nine months ended October 31, 2023, our selling, general and administrative expenses were $2,849,399 primarily legal, accounting and administrative salaries including non-cash compensation from the issuance of warrants and employee stock options compared to $2,726,256 for the nine months ended October 31, 2022.The increase from 2022 is primarily attributable to an increase in investor relations expenses offset by a decrease in salaries and wages to executives of the Company. During the nine months ended October 31, 2023, the Company incurred research and development expenses of its Aversa Fentanyl product of $1,397,055, primarily of salaries and increases in development costs from Kindeva as compared to $686,401 for the nine months ended October 31, 2022. We incurred interest expense of $52,601 for the nine months ended October 31, 2023, as compared to $12,505 for the nine months ended October 31, 2022. The increase is primarily due to interest in the Company’s related party loans. As a result of the foregoing, we sustained a net loss of $3,604,348 or $(0.46) per share (basic and diluted) for the nine months ended October 31, 2023, compared with a loss of $2,804,149, or $(0.32) per share (basic and diluted) for the nine months ended October 31, 2022. Liquidity and Capital Resources As of October 31, 2023, we had $1,265,323 in cash and cash equivalents and working capital of $1,281,963, as compared with cash and cash equivalents of $1,985,440 and working capital of $1,945,132 as of January 31, 2023. During the nine months ended October 31, 2023, the Company on March 19, 2023, entered a three-year Credit Line Note facility for $2 million, to fund its research and development of its Aversa Fentanyl product, and an amendment thereto on July 13, 2023, increasing the amount available under the credit line to $5 million. As of October 31, 2023, the Company had drawn down a total of $2,000,000 under the credit line. For the nine months ended October 31, 2023, we used cash of $2,809,269 in our operations. The principal adjustments to our net loss of $3,604,348 were depreciation and amortization of $218,382, and the issuance of employee stock options and warrants for services in the amount of $742,696. 22 For the nine months ended October 31, 2023, we used cash in investing activities of $2,624 primarily for the purchase of equipment. For the nine months ended October 31, 2023, we provided cash in financing activities of $2,091,776 primarily from the proceeds of $2,000,000 from its line of credit and $106,528 from a factoring arrangement, offset from the payment on notes of $14,752. 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. Critical Accounting Policies 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 October 31, 2023, the Company had cash and cash equivalents of $1,265,323 and working capital of $1,281,963. For the nine months ended October 31, 2023, the Company incurred a loss from operations of $3,565,577 and used cash flow from operations of $2,809,269. 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 $3,239,845 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 Credit Line Note facility, amended on July 13, 2023, to increase the credit line to $5,000,000, which will permit the Company to draw down on the credit line to fund the Company’s research and development of its Aversa 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. however, it is too early to know the full impact of COVID-19 or its timing on a return to normal operations. 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. 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. 23 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 nine months ended October 31, 2023 and 2022, the Company recorded bad debt expense of $11,836 and $-0-, respectively, for doubtful accounts related to account receivable. During the nine months ended October 31, 2023, the Company entered into an accounts receivable sale agreement for one of its subsidiaries. The Company received $106,528 in funds against an accounts receivable that is currently a claim in bankruptcy. The net accounts receivable remain on the books of the Company and a corresponding amount has been included as a secured borrowing liability under Notes payable. If the bankruptcy claim is not paid in full by the debtor, the Company is obligated to pay any difference to the factor. The bankruptcy claim has not yet been settled by the bankruptcy court. 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 October 31, 2023, total inventory was $174,641, consisting of work-in-process of $30,089 and raw materials of $144,552. As of January 31, 2023, total inventory was $229,335, consisting of work-in-process of $11,021 and raw materials of $218,334. 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 October 31, 2023 and January 31 2023, Goodwill amounted to $5,021,713 and $5,021,713, 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 October 31, 2023, and 2022, there were 2,157,873 and 1,645,506 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. 24 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable.