NUTRIBAND INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF AND FOR THE NINE MONTHS ENDED OCTOBER 31, 2018 AND 2017
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1.
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ORGANIZATION
AND DESCRIPTION OF BUSINESS
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Organization
Nutriband
Inc. (the “Company”) is a Nevada corporation, incorporated on January 4, 2016. In January 2016, the Company acquired
Nutriband Ltd, an Irish company which was formed by the Company’s chief executive officer in 2012 to enter the health and
wellness market by marketing transdermal patches. References to the Company relate to the Company and its subsidiaries unless
the context indicates otherwise.
On
August 1, 2018, the Company acquired 4P Therapeutics LLC (“4P Therapeutics”) for $2,250,000, consisting of 250,000
shares of common stock, valued at $1,850,000, and $400,000, and a royalty payable to the former owner of 4P Therapeutics, of 6%
on all revenue generated by the Company from the abuse deterrent intellectual property that had been developed by 4P Therapeutics.
The former owner of 4P Therapeutics has been a director of the Company since April 2018, when the Company entered into an agreement
to acquire 4P Therapeutics.
4P
Therapeutics is engaged in the development of a series of transdermal pharmaceutical products that are in the preclinical stage
of development. Prior to the acquisition of 4P Therapeutics, the Company’s business was the development and marketing of
a range of transdermal consumer patches. Most of these products are considered drugs in the United States and cannot be marketed
in the United States without approval by the Food and Drug Administration (the “FDA”). The Company is not presently
taking any steps to seek FDA approval of its consumer transdermal products and its consumer products are not being marketed in
the United States.
With
the acquisition of 4P Therapeutics, 4P Therapeutics’ drug development business became the Company’s principal business.
The Company’s approach is to use generic drugs that are off patent and incorporate them into the Company’s transdermal
drug delivery system. Although these medications have received FDA approval in oral or injectable form, the Company needs to conduct
a transdermal product development program which will include the preclinical and clinical trials that are necessary to receive
FDA approval before we can market any of our pharmaceutical products.
Going
Concern
The
Company’s consolidated financial statements for the nine months ended October 31, 2018 have been prepared on a going concern
basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.
The Company did not generate any revenue prior to the quarter ended October 31, 2018, it has a history of recurring losses from
operations, and for the nine months ended October 31, 2018, the Company generated revenue of $162,815 on which it recorded a negative
gross profit of $43,468 and a loss from operations and net loss of $2,815,490. The Company will require substantial funding to
execute its strategic business plan. Successful business operations and its transition to attaining profitability are dependent
upon obtaining significant additional financing and achieving a level of revenue to support its cost structure and obtaining FDA
approval to market its products in development. These factors raise substantial doubt about ability of the Company to continue
as a going concern.
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2.
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SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
The
consolidated balance sheet as of October 31, 2018 and the consolidated statements of operations and cash flows for the periods
presented have been prepared by the Company and are unaudited. The consolidated financial statements are prepared in accordance
with the requirements for unaudited interim periods pursuant to Rule 8-03 of Regulation S-X, and consequently, do not include
all disclosures required to be made in conformity with accounting principles generally accepted in the United States of America.
In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly
the financial position, results of operations, changes in stockholders' equity and cash flows for all periods presented have been
made. The information for the consolidated balance sheet as of January 31, 2018 was derived from audited financial statements
of the Company. The Company’s significant accounting policies are found below. These policies should be read in conjunction
with Note 1 found in the Company’s Annual Report on Form 10-K for the year ended January 31, 2018.
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.
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 various other 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 existing 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 adopted the
guidance under the new revenue standards using the modified retrospective method effective February 1, 2018. Topic 606 requires
the Company to recognize revenues when control of the promised goods or services and receipt of payment is probable.
Upon
adoption, the new standards replaced most existing revenue recognition guidance in U.S. GAAP. The adoption of the new revenue
recognition standards did not have any impact on its consolidated financial statements since the Company did not recognize any
revenue prior to the third quarter of 2018, and all revenue will be recognized pursuant to Topic 606 under the five-step model
specified by the new revenue standards.
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 5 years as follows:
Intangibles
Intangibles
consist of intellectual property of 4P Therapeutics. The intellectual property is being amortized over its useful life of 10 years.
Evaluation
of Long-lived Assets
Intellectual
property represent an important component of the Company’s total assets. The Company amortizes its intellectual property
assets on a straight-line basis over the estimated useful lives of the 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 fair market value of the long-lived asset and the related net book value.
In
May 2017, the Company acquired Advanced Health Brands, Inc., the principal assets of which were provisional patents, for stock
valued at $2,500,000. As of January 31, 2018, the Company recorded an impairment charge of $2,500,000 and reduced the book value
of the assets to $-0-.
Stock-Based
Compensation
ASC
718, “Compensation - Stock Compensation,” prescribes accounting and reporting standards for all share-based payment
transactions in which employee services 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).
The
Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC
505-50, “Equity - Based Payments to Non-Employees.” Measurement of share-based payment transactions with non-employees
is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments
issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance
completion date.
During
the nine months ended October 31, 2018, the Company incurred $1,763,950 of expenses from the issuance of 322,000 shares of common
stock for services. During the nine months ended October 31, 2017, the Company incurred $57,500 of expenses, of which $32,500
was expensed during the nine months ended October 31, 2017 and $25,000 is included in prepaid expenses) from the issuance 115,000
shares of common stock for services. The common stock issued as compensation was valued at the market price on the respective
dates of grant.
Accounting
Standards Issued But Not Yet Adopted
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. This guidance is effective for the annual periods and interim periods beginning December
15, 2018. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. Early adoption
is permitted. The update guidance requires a modified retrospective adoption. We are currently in the process of evaluating this
new standard update
.
In
June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting.” These amendments expand the scope of Topic 718, Compensation—Stock Compensation (which currently
only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services.
Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes
Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees. ASU 2018-07 is effective for public companies for fiscal
years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no
earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company does not currently
expect the adoption to have any significant impact on the Company’s financial statements.
The
Company has implemented all new pronouncements that are in effect and that may impact its consolidated financial statements and
does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact
on its consolidated financial statements or results of operations.
Reclassifications
Certain
items have been reclassified to conform to present year presentation.
Inventory
as of October 31, 2018 and January 31, 2018 is as follows:
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October 31, 2018
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January 31, 2018
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Finished goods
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$
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4,133
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$
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4,133
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Work in progress
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|
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-
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-
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Raw materials
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-
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|
|
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-
|
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$
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4,133
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$
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4,133
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Due
to related parties as of October 31, 2018 and January 31, 2018, consists of loans from officers and related parties, that are
interest free and due on demand. As of October 31, 2018, and January 31, 2018, short-term debt due to related parties amounted
to $-0- and $14,230, respectively. The loans were paid in full May 2018.
Note
payable as of October 31, 2018 and January 31, 2018, consists of a loan from South County Dublin Council that is interest free
with monthly payments of $75. The loan was due October 2017. As of October 31, 2018 and January 31, 2018, the total balance of
long-term debt (current portion) amounted to $-0- and $1,820, respectively. The loan was paid in July 2018.
On
September 12, 2017, the Company received an interest-free loan from an unrelated party in the amount of $15,000. The Company received
an additional advance from the unrelated party of $25,000 during April 2018. The loan is interest free and due upon demand. As
of October 31, 2018, and January 31, 2018, the balance due was $40,000 and $15,000, respectively, and amount is included in notes
payable.
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5.
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ACQUISITION
OF BUSINESS
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On
August 1, 2018, the Company acquired 4P Therapeutics for $2,250,000, consisting of 250,000 shares of common stock, valued at $1,850,000,
and $400.000, and a royalty payable to the former owner of 4P Therapeutics, of 6% on all revenue generated by us from the abuse
deterrent intellectual property that had been developed by 4P Therapeutics.
The
preliminary purchase price allocation is provisional, pending completion by the Company of its valuation of the assets of 4P Therapeutics,
and has been used to prepare the balance sheet and statement of operations. The final purchase price allocation will be determined
when the Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially
from the preliminary allocation used in the adjustments.
Details
of the net assets acquired are as follows:
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Fair Value Recognized
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On Acquisition
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Equipment
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$
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100,000
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Intangible assets
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2,150,000
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Net assets acquired
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2,250,000
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Satisfied by:
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Common stock issued
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$
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(1,850,000
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)
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Cash outflows on acquisition
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(400,000
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)
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Changes
in intangible assets for the period ending October 31, 2018 were as follows:
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Intangible Assets
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Balance - January 31, 2018
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$
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-
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Additions from acquisition
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2,150,000
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Amortization for period ended October 31, 2018
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(53,750
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)
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Net book value – October 31, 2018
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$
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2,096,250
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The
valuation of the intangible assets is provisional pending completion by the Company of its valuation of the assets of 4P Therapeutics
and are being amortized over a period of ten years.
No
value has been given to the potential royalty payable to the former owner since the royalty is contingent upon the Company generating
revenue from any source and there is no marketable product and are uncertainties, including the need for FDA approval, as to whether
or when any revenue will be generated from the intellectual property subject to the royalty. If any royalties are paid to the
former owner of 4P Therapeutics, the royalties will be expensed as incurred and treated as an operating expense.
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7.
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RELATED
PARTY TRANSACTIONS
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a)
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As
of October 31, 2018, and January 31, 2018, the mother of the chief executive officer,
advanced the Company $-0- and $10,230, respectively, for operating capital. The advance
was interest free and due on demand. The advance was repaid in full May 2018.
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b)
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During
the year ended January 31, 2018, the chief financial officer advanced $8,250 to the Company,
all of which was repaid as of January 31, 2018. Additionally, the Company had amounts
owed to the chief financial officer for payments made on behalf of the Company of $30,800
and $4,000 as of April 30, 2018 and January 31, 2018, respectively. The amounts were
repaid in full May 2018.
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c)
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The
former owner of 4P Therapeutics has been a director of the Company since April 2018,
when the Company entered into an agreement to acquire 4P Therapeutics. See Note 6 in
connection with the terms of the acquisition of 4P Therapeutics from the former owner.
The former owner was not a director of the Company when the acquisition agreement was
signed.
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d)
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During
the nine months ended October 31, 2018, the Company issued 210,000 shares of common stock,
valued at $967,500 to executives of the Company and 30,000 shares of common stock, valued
at $222,000, to directors of the Company. The stock was valued at the market price on
the date of grant.
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The
Company issued 322,000 shares of common stock valued at $1,763,950, based on the market price on the date of issuance, during
the nine months ended October 31, 2018 for services provided to the Company. Of these shares, 210,000 shares valued at $967,500
were issued to executives of the Company and 30,000 shares valued at $222,000 were issued to directors of the Company.
On
May 2, 2018, the Company sold to an unrelated party for $1.0 million, 250,000 shares stock and 30-day warrants to purchase 250,000
shares of common stock at $4.00 per share. On May 27, 2018, the unrelated party exercised warrants to purchase 125,000 shares
of common stock and on June 2, 2018, warrants to purchase 125,000 shares of common stock expired unexercised.
On
July 31, 2018, the Company issued 250,000 shares of common stock valued at $1,850,000 representing a portion of the purchase price
for the equity of 4P Therapeutics. See Note 6.
The
following table summarizes the changes in warrants outstanding and the related price of the shares of the Company’s common
stock issued to non-employees of the Company.
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Shares
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Exercise Price
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Remaining Life
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Intrinsic Value
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Outstanding, January 31, 2018
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730,000
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$
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1.58
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1.35 years
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-
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Granted
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250,000
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4.00
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-
|
|
|
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-
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Exercised
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(125,000
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)
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4.00
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|
|
|
-
|
|
|
|
-
|
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Expired/Cancelled
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|
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(125,000
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)
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|
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4.00
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|
|
|
-
|
|
|
|
-
|
|
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Outstanding, October 31, 2018
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|
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730,000
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|
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$
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1.58
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0.60 years
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$
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4,320,000
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|
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Exercisable, October 31, 2018
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730,000
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|
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$
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1.58
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0.60 years
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$
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4,320,000
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Basic
earnings per share of common stock are computed by dividing net income by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share of common stock are computed by dividing net earnings by
the weighted average number of shares and potential shares outstanding during the period. Potential shares of common stock
consist of shares issuable upon the exercise of outstanding common stock purchase warrants. As of October 31, 2018, there were
730,000 common stock equivalents outstanding, that were not included in the calculation of dilutive earnings per share as their
effect would be anti-dilutive.
As
previously, disclosed, the Company, the chief executive officer and the chief financial officer received a Wells notice on August
10, 2018 from the Enforcement Division staff of the U.S. Securities and Exchange Commission, Miami Regional Office in connection
with an investigation into the Company’s disclosure about the FDA requirements for its consumer transdermal patch products
made in the Company’s disclosures about FDA requirements for its transdermal products in the Company’s Form 10 registration
statement and amendments (filed June 2, 2016) and Form 10-K annual report (filed May 8 2017). In the Wells notice, the enforcement
division staff informed the Company that it intended to recommend that the Commission authorize a civil injunctive action alleging
that the Company and the named officers violated certain provisions of the federal security laws, including Section 10(b) and
13(a) of the Security Exchange Act of 1934, with respect to the Company’s FDA disclosures in its public filings. On September
7, 2018, the Company and officers filed a Wells Submission with the Enforcement Division staff explaining why they did not violate
the federal securities law and why the Commission should not file a civil injunctive action and not seek civil monetary penalties
and other forms of equitable relief. The Company and named officers are involved in settlement discussions with the staff of the
Enforcement Division to resolve the investigation.
On
July 27, 2018, the Company commenced an action in the Circuit Court of the Ninth Judicial Circuit in and for Orange County, Florida,
against Advanced Health Brands, Inc., Raymond Kalmar, Paul Murphy, Michelle Polly-Murphy, Laura Fillman and John Baker, together
with a Motion for Temporary Injunction Without Notice and a Motion for Prejudgment Writ of Replevin arising from the Company’s
decision to seek to rescind for misrepresentation the agreement by which the Company acquired advanced Health Brans, Inc. for
5,000,000 shares of common stock valued at $2,500,000 and seek return of the shares. On August 2, 2018, the court entered a Temporary
Injunction Without Notice and an Order to Show Cause against the defendants. Defendants Kalmar, Murphy, Polly-Murphy, and Baker
have filed a Motion to Dismiss our Verified Complaint, Motion to Dissolve Temporary Injunction Without Notice and Response to
Order to Show Cause, and Motion to Compel Arbitration. The parties presented oral arguments to the Court on August 22 and 24,
2018. The Court has yet to rule on any motion or issue presented. The parties are currently scheduled to continue their respective
oral arguments before the Florida court on December 7, 2018. One of the defendants, Laura Fillman, returned her 200,000 shares
in November 2018.
On
November 19, 2018, the Company and Carmel Biosciences terminated the previously-announced acquisition agreement principally as
a result of concerns about the uncertainties and risks involving the drug valsartan and the potential presence of possible carcinogens
from the manufacturing process from various manufacturers. The agreement was terminated without any obligation of either party
to the other party.
On
November 23, 2018, the Company sold to T.I.I. Jet Services LDA., a Portuguese company, 71,429 shares of common stock for $500,000.
ITEM 2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Overview
We
are principally engaged in the development of a portfolio of transdermal pharmaceutical products. Our lead pharmaceutical product
is our abuse deterrent fentanyl transdermal system, which we are developing to combat the opioid crisis by deterring the abuse
and accidental misuse of fentanyl patches. We believe that transdermal delivery of commercially available drugs or biologics that
are typically delivered by injection has the potential to improve safety, efficacy and therapeutic outcomes associated with these
treatments.
Through
July 31, 2018, our business was the development of a full line of consumer and health products that are delivered through a transdermal
patch which we plan to sell internationally. Most of these 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 product in the United States at
this time. Presently our efforts with respect to our transdermal consumer products is limited to our distribution agreement with
EMI-Korea (Best Choice), Inc., whom we refer to as Best Choice, which is marketing certain of our consumer products in South Korea.
With
our acquisition of 4P Therapeutics on August 1, 2018, our focus has changed, and we are seeking to complete the development 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 with our lead product being our abuse deterrent fentanyl
transdermal system.
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 have continued this activity since our acquisition, although
we do not anticipate that it will generate significant revenues or gross margin. Currently, there are no long-term contractual
obligations for us and either party can terminate at any time.
Prior
to our acquisition, 4P Therapeutics had halted its development of its transdermal pharmaceutical products due to lack of funding.
In November 2018, we raised $500,000 from the sale of common stock, and, with the proceeds from that investment, we are working
on the development of our abuse deterrent fentanyl transdermal system, which is our lead product. We plan to devote our resources
to the development of our lead product and other product candidates in our pipeline, and we do not expect that we will generate
any significant revenue from performing research and development and related services for our clients.
With
the change in our focus, our capital requirement 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, and we presently do not have the funding for such activities. In order to develop
our products we will require significant additional funding, and we can give no assurance that we will be able to raise the necessary
funding or reasonable, if any, terms.
Results
of Operations
Three
and Nine Months Ended October 31, 2018 and 2017
We
did not generate any revenues prior to the quarter ended October 31, 2018. For the three and nine months ended October 31, 2018,
we generated revenue of $162,815 and our costs of revenues were $206,283. Our revenue was derived from two sources – a continuation of research and development contracts
of the type that 4P Therapeutics performed prior to our acquisition, which accounted for $113,815, and sales of our consumer transdermal
product to our South Korean distributor, which accounted for $49,000. Our charges for the research and development are basically
our labor cost plus a modest amount of material costs which we passed on to the client.
In
connection with our consumer transdermal products, our supplier ran into supply problems for certain foil components used in the
transdermal patches due to the new tariffs on Chinese imports into the United States which resulted in manufacturing delays in
meeting the first order for our South Korean distributor and increased expenses as it was necessary for our Korean distributor
to perform, at our cost, some of the manufacturing functions in South Korea. We are working to resolve these manufacturing problems.
For
the three months ended October 31, 2018 our selling, general and administrative expenses were $445,152, primarily legal, accounting
and payroll expense, compared to $87,732 in the three months ended October 31, 2017. The increase from 2017 is primarily due
to an increase in legal fees and payroll expenses during the quarter. Stock-based compensation was $20,000 for the three months
ended October 31, 2017. We did not have any stock-based compensation in the three months ended October 31, 2018.
For
the nine months ended October 31, 2018 our selling, general and administrative expenses were $1,008,072, primarily legal,
accounting and payroll expense, compared to $203,811 in the nine months ended October 31, 2017. The increase from 2017 is
primarily due to an increase in legal fees and payroll expenses, which included modest expenses relating to our operations at
4P Therapeutics. Our stock-based compensation expense for the nine months ended October 31, 2018 was $1,763,950, compared to
$32,500 for the nine months ended October 31, 2017. The stock-based compensation relates to shares of common stock that were
issued as compensation to officers, directors and others who provided services to us.
As
a result of the foregoing, we sustained a net loss of $488,620, or $(0.02) per share (basic and diluted) for the three months
ended October 31, 2018, compared with a loss of $107,732, or $(0.01) per share (basic and diluted) for the three months ended
October 31, 2017. For the nine months ended October 31, 2018, we sustained a loss of $2,815,490, or $(0.13) per share (basic and
diluted) as compared with a loss of $236,311, or $(0.01) per share (basic and diluted) for the nine months ended October 31, 2017.
Liquidity
and Capital Requirements
As
of October 31, 2018, we had $ 257,545 in cash. At that date, we had working capital of $225,726, compared with working capital
of $121,508 at January 31, 2018. In May 2018, we raised $1.0 million from an equity financing and $500,000 from the exercise of
warrants issued in the equity financing. However, we had a negative cash flow from operations of approximately $823,000 and we
paid $400,000 in connection with the acquisition of 4P Therapeutics.
For
the nine months ended October 31, 2018, we used cash of $822,752 in our operations. The principal adjustments to our net loss
of $2,815,490 were stock-based compensation of $1,763,950, an increase in accounts payable of $158,751, a decrease in prepaid
expenses of $80,320 and depreciation and amortization of $59,529 offset by an increase in accounts receivable of $93,930.
For
the nine months ended October 31, 2017, we used $81,463 in our operations. The principal adjustments to our net loss of $236,311,
were depreciation and amortization of $110,445 and stock based compensation of $32,500.
For
the nine months ended October 31, 2018, our net cash from financing operations was $1,483,880, primarily resulting from the sale
of equity for $1.0 million and the exercise of a warrant for $500,000. Our net cash used in investing activities for the nine
months ended October 31, 2018 was $404,163, principally the $400,000 payment made to acquire 4P Therapeutics.
For
the nine months ended October 31, 2017, our cash flow from financing activities was $55,000, consisting of $40,000 from the sale
of common stock and $15,000 from the proceeds of notes. There was no cash flow from investing activities for the nine months ended
October 31, 2017.
In November 2018, we received $500,000 from
the sale of common stock, and we are using a portion of the proceeds from that financing to develop our abuse deterrent fentanyl
transdermal system. We estimate that we will require up to $2,000,000 for the next twelve months of operations, and we estimate
that we will require $5,000,000 for our fentanyl transdermal product research and development, including clinical manufacturing
and clinical trials in the FDA approval process over a period of several years. In order to finance our operations, we will need
to raise funds either through the sale of our equity securities or, if we are unable to raise sufficient funds through the sale
of our equity securities, through a joint venture or strategic alliance. We cannot assure that we will be able to raise funds through
the sale of our equity securities or that we will be able to enter into a joint venture or strategic alliance on reasonable, if
any terms. If we are unable to raise the necessary funds, we may be unable to continue in business.
Off
Balance Sheet Arrangements
We
currently 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.
Going
Concern
Our
consolidated financial statements for the nine months ended October 31, 2018 have been prepared on a going concern basis which
contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. We did
not generate any revenue prior to the quarter ended October 31, 2018, we have a history of recurring losses from operations, and
for the nine months ended October 31, 2018 we generated revenue of $162,815 on which we incurred a loss from operations of $2,815,490.
We will require substantial funding to execute our strategic
business plan. Successful business operations and our transition to attaining profitability are dependent upon obtaining significant
additional financing and achieving a level of revenue to support our cost structure and obtaining FDA approval to market our products
in development. These factors raise substantial doubt about our ability to continue as a going concern.
Critical
Accounting Policies
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America requires us 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, we evaluate our 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. We base our estimates on historical experience and on various other 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 existing 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.
Upon
adoption, the new standards replaced most existing revenue recognition guidance in U.S. GAAP. The adoption of the new revenue
standards did not have any impact on our consolidated financial statements since we did not recognize any revenue prior to the
third quarter of 2018, and all revenue will be recognized pursuant to Topic 606 under the five-step model specified by the new
revenue recognition standards.
Intangibles
Intangibles
consist of intellectual property of 4P Therapeutics. The intellectual property is being amortized over its useful life of 10 years.
Evaluation
of Long-lived Assets
Intellectual
property represents an important component of our assets. We amortize our intellectual property on a straight-line basis over
the estimated useful lives of the 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 fair market value of the long-lived asset and the related net book value.
Stock-Based
Compensation
ASC
718, “Compensation - Stock Compensation,” prescribes accounting and reporting standards for all share-based payment
transactions in which employee services 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).
We
account for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50,
“Equity - Based Payments to Non-Employees.” Measurement of share-based payment transactions with non-employees is
based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments
issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance
completion date.
During
the nine months ended October 31, 2018, we incurred $1,763,950 of expenses from the issuance of 322,000 shares of common stock
for services. During the nine months ended October 31, 2017, we incurred $57,500 of expenses, of which $32,500 was expensed during
the nine months ended October 31, 2017 and $25,000 is included in prepaid expenses) from the issuance 115,000 shares of common
stock for services. The common stock issued as compensation was valued at the market price on the respective dates of grant.
Business
Combinations
Business
combinations are accounted for using the acquisition method in accordance with ASC Topic 805, Business Combinations (“ASC
805”). Under the acquisition method of accounting, we allocate the purchase price of a business acquisition based on the
fair value of the identifiable tangible and intangible assets. The difference between the total cost of the acquisition and the
sum of the fair values of the acquired tangible and identifiable intangible assets less liabilities is recorded as goodwill or
bargain purchase gain. Under ASC 805, acquisition related transaction costs (such as advisory, legal, valuation, and other professional
fees) are expensed as incurred.
Recent
Financial Accounting Standards
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. This guidance is effective for the annual periods and interim periods beginning December
15, 2018. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. Early adoption
is permitted. The update guidance requires a modified retrospective adoption. We are currently in the process of evaluating this
new standard update.
In
June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting.” These amendments expand the scope of Topic 718, Compensation—Stock Compensation (which currently
only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services.
Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes
Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees. ASU 2018-07 is effective for public companies for fiscal
years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no
earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. We do not currently expect the
adoption to have any significant impact on our financial statements.
We
have implemented all new pronouncements that are in effect and that may impact its consolidated financial statements and do not
believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our
consolidated financial statements or results of operations.
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
|
Not
applicable.
ITEM 4.
|
CONTROLS AND PROCEDURES
|
Disclosure
controls and procedures.
As
of the end of period covered by this report, we carried out an evaluation, with the participation of our chief executive officer
and chief financial officer, of the effectiveness of our disclosure controls and procedures pursuant to Securities Exchange Act
Rule 13a-15. Based upon that evaluation, we concluded that for reasons discussed in our annual report on Form 10-K for the year
ended January 31, 2018, our disclosure controls and procedures are not effective in ensuring that information required to be disclosed
by us in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC’s rules and forms.
Changes
in internal controls over financial reporting.
No
changes were made to our internal controls in the quarterly period covered by this report that have materially affected, or are
reasonably likely materially to affect, our internal control over financial reporting.
PART
II—OTHER INFORMATION