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.
Overview
AVERSA™ Abuse Deterrent Transdermal Products
Our primary business is the development of a portfolio
of transdermal pharmaceutical products. Our lead product under development is AVERSA Fentanyl, our abuse deterrent fentanyl transdermal
system which will require approval from the Food and Drug Administration (“FDA”) and substantial capital for research and
development. AVERSA Fentanyl 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 other 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 a risk of abuse, misuse or accidental exposure.
On September 19, 2023, the United States Patent
and Trademark Office (USPTO) granted US Patent No. 11,759,431 for Nutriband’s proprietary AVERSA abuse deterrent technology utilizing
taste aversion to address the primary routes of abuse of opioid based transdermal patches. The issuance of this patent, entitled, “Abuse
and Misuse Deterrent Transdermal Systems,” further expands Nutriband’s intellectual property protection in the United States
for its portfolio of AVERSA abuse deterrent transdermal products.
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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 third 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.
With the change in our focus, our capital requirements
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 March 20, 2024, our Board of Directors adopted
an amendment to the Company’s 2021 Employees Stock Option Plan (the “Plan”) increasing the number of shares of
common stock subject to the Plan (as of March 20, 2024) to 1,400,00 shares (the “Amendment”). The Plan adopted by the Board
on November 1, 2021, provided for an initial 350,000 shares to issue and sell upon the exercise of stock options issued under the
Plan.. We submitted the Amendment to the Plan to our stockholders for adoption and approval at the 2025 Annual Meeting, increasing the
authorized number of shares of common stock available for issuance of options to 1,400,000 shares, which Amendment was approved by our
stockholders at the meeting.
On April 19, 2024, the Company completed an $8,400,000
equity financing with European investors (the “Offering”) of 2,100,000 units (“Units”), at a price of $4.00 per
Unit, each Unit consisting of one share of common stock (“Shares”) and a Warrant to purchase two Shares of common stock, the
Warrants having an initial exercise price of $6.43, are exercisable by payment of the exercise price in cash only and expire April 19,
2029, five years from the date of issuance (“Warrants”). The Offering was made solely to investors resident outside the United
States and was not registered under the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws
of any jurisdiction, including any jurisdiction outside the United States, but was made privately by the Company pursuant to the exemptions
from registration provided in the SEC’s Regulation S and other exemptions under the Securities Act.
Years Ended January 31, 2025 and 2024
For the year ending January 31, 2025, we generated
revenue of $2,139,537 and our costs of revenue were $1,396,220 resulting in a gross margin of $743,317. For the year ending January 31,
2024, we generated revenue of $2,085,314 and our costs of revenue were $1,223,209 resulting in a gross margin of $862,105. Our revenue
for the year ended January 31, 2025, was derived from sales from our Pocono Pharmaceuticals segment and $-0- from contract research and
development services from our 4P Therapeutics segment. The revenue from the Pocono Pharmaceuticals segment remained relatively constant
from the prior year. An increase in demand is expected in the subsequent year. There were no sales in our 4P Therapeutics segment in the
current year due to a shift in focus and the main contract wound down in the prior year. The decline in gross margin is due primarily to lower margins on tape sales.
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For the year ending January 31, 2025, our selling,
general and administrative expenses were $4,313,810, primarily salaries and wages, public relations, legal, accounting, and non-cash compensation
from the issuance of warrants and employee stock options, compared to $3,773,606 for the year ending January 31, 2024. The increase from
2024 is primarily due to an increase in non-cash compensation and public relations.
During the year ending January 31, 2025, the Company
incurred research and development expenses for its Aversa Fentanyl product of $3,119,134, primarily due to labor and material costs incurred
at our contract manufacturer, Kindeva Drug Delivery, as compared to $1,960,425 for the year ending January 31, 2024.
During the year ending January 31, 2025, the Company
recorded an impairment charge of $3,595,216 reducing the value of its Goodwill and intangible assets. The impairment charge reflected
an updated valuation primarily of the Company’s Goodwill.
During the year ending January 31, 2025, the Company
incurred a loss on extinguishment of debt of $368,036 in connection with issuance of common stock and warrants to a related party debtor.
During the year ending January 31, 2024, the Company incurred a loss on extinguishment of debt of $554,423, consisting primarily of the
loss on the conversion of $2,000,000 of credit line note into 1,026,750 shares of the Company’s common stock.
We incurred interest expense of $21,407 for the
year ending January 31, 2025, as compared to $75,815 for the year ended January 31, 2024. The decrease is primarily due to the decrease
in the Company’s related party credit line note.
Interest income for the year ending January 31,
2025, was $191,669 as compared to $16,850 for the year ending January 31, 2024. The increase is primarily due to the investment of excess
cash from the Company’s equity financing.
As a result of the foregoing, we sustained a net
loss of $10,482,617, or $(0.99) per share (basic and diluted) for the year ended January 31, 2025, compared with a loss of $5,485,314,
or $(0.69) per share (basic and diluted) for the year ended January 31, 2024.
Liquidity and Capital Resources
As of January 31, 2025, we had $4,311,719 in cash
and cash equivalents and working capital of $3,811,420, as compared with cash and cash equivalents of $492,942 and working capital of
$22,770 as of January 31, 2024. On April 19, 2024, the Company completed an $8,400,000 equity financing with European investors
(the “Offering”) of 2,100,000 units (“Units”), at a price of $4.00 per Unit, each Unit consisting of one share
of common stock (“Shares”) and a Warrant to purchase two Shares of common stock.
For the year ending January 31, 2025, we used
cash of $4,626,564 in our operations. The principal adjustments to our net loss of $10,284,483 were an impairment charge of $3,595,216,
depreciation and amortization of $285,054, net loss on extinguishment of debt of $368,036 and stock-based compensation of $1,542,285.
For the year ending January 31, 2025, we used
cash in investing activities of $92,043 primarily for the purchase of equipment.
For the year ending January 31, 2025, we provided
cash in financing activities of $8,537,384, primarily from the proceeds of $8,400,000 from the sale of common stock and warrants and $300,000
from its line of credit.
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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 January 31, 2025, the Company had cash and cash equivalents of
$4,311,719 and working capital of $3,811,420. For the year ended January 31, 2025, the Company incurred a net loss from operations of
$10,284,843 and used cash flow from operations of $4,626,564. The Company has generated operating losses since its inception and has relied
on sales of securities and the issuance of third-party and related-party debt to support cash flow from operations. 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 with a related party, amended on July 13, 2023, 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. On April 19, 2024, the Company received proceeds
of $8,400,000 from equity financing with European investors.
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.
Management believes the
substantial doubt about the ability of the Company to continue as a going concern is alleviated by the above assessment.
Principles of Consolidation
The consolidated financial
statements of the Company include the Company and its wholly owned subsidiaries. All material intercompany balances and transactions have
been eliminated. The operations of 4P Therapeutics are included in the Company’s financial statements from the date of acquisition
of August 1, 2018, and the acquired operations of Pocono Coated Products and Active Intelligence are included in the Company’s financial
statements from the date of acquisition of September 1, 2020, under Pocono Pharmaceuticals Inc. The wholly owned subsidiaries are as follows:
Nutriband
Ltd.
4P
Therapeutics LLC
Pocono
Pharmaceuticals Inc.
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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.
Revenue Types
The following is a description
of the Company’s revenue types, which include professional services and sale of goods:
● Contract development and manufacturing services
for consumer health transdermal, topical and tape products with revenues listed under sale of goods.
● Product revenues derived from the sale of the
Company’s consumer transdermal, topical and tape products with sales listed under sale of goods.
● Contract research and development services for
pharmaceutical and medical devices for life sciences customers with revenues listed under services.
Contracts with Customers
A contract with a customer exists when
(i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be
transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and, (iii)
we determine that collection of substantially all consideration for services that are transferred is probable based on the customer’s
intent and ability to pay the promised consideration.
Contract Liabilities
Deferred revenue is a liability related
to a revenue producing activity for which revenue has not been recognized. The Company records deferred revenue when it receives consideration
from a contract before achieving certain criteria that must be met for revenue to be recognized in conformity with GAAP.
Performance Obligations
A performance obligation is a promise
in a contract to transfer a distinct good or service to the customer and is the unit of account in the new revenue standard. The contract
transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation
is satisfied. For the Company’s different revenue service types, the performance obligation is satisfied at different times. The
Company’s performance obligations include providing products and professional services in the area of research. The Company recognizes
product revenue performance obligations in most cases when the product has shipped to the customer. When we perform professional service
work, we recognize revenue when we have the right to invoice the customer for the work completed, which typically occurs over time on
a monthly basis for the work performed during that month.
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All revenue
recognized in the income statement is considered to be revenue from contracts with customers.
Cash and cash equivalents.
Cash and cash equivalents include cash on
hand, snd cash on deposit in money market accounts. The Company considers short-term highly liquid investments with an original maturity
date of three months or less that are not part of an investment pool to be cash equivalents. As of January 31, 2025, the Company had $3,804,000
that exceeded federally insured cash balance limits.
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 the 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, 2025, and 2024, the Company recorded bad debt expenses of $1,200 and $11,836, respectively, for doubtful accounts related to accounts
receivable. During the year ended January 31, 2024, the Company entered into an accounts receivable sale agreement for one of its subsidiaries.
The Company received $106,528 in funds against an account 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.
As of January 31, 2025, the receivable has been reserved in full. If the bankruptcy claim is not paid in full by the debtor, Company is
obligated to pay any difference to the factor. The loan bears interest at 10%. The Company adopted ASU 2016-13 during 2013 and implemented
the guidance on expected credit losses.
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, 2025, total inventory was $212,041, consisting of work-in-process of $46,255, finished goods of $16,609 and
raw materials of $149,177. As of January 31, 2024, total inventory was $168,605, consisting of work-in-process of $7,466, finished goods
of $8,707 and raw materials of $152,432.
Property, Plant
and Equipment
Property and equipment
represent an important component of the Company’s assets. The Company depreciates its plant and equipment on a straight-line basis
over the estimated useful life of the assets. Property, plant and equipment is stated at historical cost. Expenditures for minor repairs,
maintenance and replacement parts which do not increase the useful lives of the assets are charged to expense as incurred. All major additions
and improvements are capitalized. Depreciation is computed using the straight-line method. The lives over which the fixed assets are depreciated
range from 3 to 20 years as follows:
Lab Equipment
5-10 years
Furniture and fixtures
3-5 years
Machinery and equipment
5-20 years
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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 has 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. During the year ending January 31, 2025, the Company recorded an impairment
charge of $293,038 to its Intellectual property.
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 ending
January 31, 2025 and 2024, the Company recorded an impairment charge of $3,302,478 and $-0-, respectively, reducing the Active Intelligence
LLC Goodwill to $-0-. As of January 31, 2025, and 2024, Goodwill amounted to $1,719,535 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 January 31, 2025, and 2024, there were 6,920,641 and 2,157,873 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.
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Business Combinations
The Company recognizes
the assets acquired, the liabilities assumed, and any non-controlling interest in the acquired entity at the acquisition date, measured
at their fair values as of that date, with limited exceptions specified in the accounting literature. In accordance with this guidance,
acquisition-related costs, including restructuring costs, must be recognized separately from the acquisition and will generally be expensed
as incurred.
Leases
In
February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842), to provide a new comprehensive model for lease accounting
under this guidance, lessees and lessors should apply a “right-of-use” model in accounting for all leases (including subleases)
and eliminate the concept of operating leases and off-balance-sheet leases. Recognition, measurement and presentation of expenses will
depend on classification as a finance or operating lease. Similar modifications have been made to lessor accounting in-line with revenue
recognition guidance.
The
Company applies guidance for right-of-use accounting for all leases and records the operating lease liabilities on its balance sheet.
The Company completed the necessary changes to its accounting policies, processes, disclosure and internal control over financial reporting.
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 a 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 determined
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 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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