UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of The Securities Exchange Act of 1934
NERIUM BIOTECHNOLOGY INC.
Ontario | 14-1987900 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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11467 Huebner Road, Suite 175, San Antonio, Texas | 78230 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (210) 822-7908
Copies to:
Cole Schotz P.C.
One Boca Place
2255 Glades Road, Suite 142 W
Boca Raton, Florida 33431
Attn: Arnold Zipper, Esq.
Securities to be registered pursuant to Section 12(g) of the Act:
Common Shares
(Title of class)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated filer ☐ | Smaller reporting company ☒ |
Non-accelerated filer ☒ | Emerging growth company ☐ |
Accelerated filer ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
TABLE OF CONTENTS
i
FORWARD-LOOKING STATEMENTS
This Form 10 contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical fact, contained in this Form 10, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "predict," "project," "target," "potential," "will," "would," "could," "should," "continue," and similar expressions, are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important cautionary statements in this Form 10, particularly in the "Risk Factors" section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
You should read this Form 10 and the documents that we have filed as exhibits to this Form 10 with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this Form 10 are made as of the date of this Form 10, and we do not assume any obligation to update any forward-looking statements except as required by applicable law.
ITEM 1. BUSINESS.
Overview
Nerium Biotechnology, Inc. ("NBI") was incorporated under the Canada Business Corporations Act by the filing of its Articles of Incorporation on June 1, 2006. NBI and its subsidiaries are referred to herein as "Nerium" or the "Company." The registered and principal office of the Company is located at 11467 Huebner Road, Suite 175, San Antonio, Texas 78230.
Nerium is a biotechnology company involved in the research, development, manufacturing and marketing of oleander-based products for the treatment of certain forms of proliferative diseases and viral infections, and various skincare products based on the patented Nerium aloe extract, NAE-8®. The Company's current product line includes pharmaceutical products Anvirzel®, Nerium Immune and Nerium Viral, as well as cosmetic skincare lines NeriumAD®, Nerium Advanced, and NeriumRX.
Beginning in 2011, the Company distributed its cosmetic skincare products exclusively through Nerium International, LLC ("NI"), a multi-level marketing company in which it held a 30% interest. From 2011 through 2015, revenues grew significantly. During that period, cumulative sales were $122.678 million. In 2015, however, the Company became involved in litigation with NI, and the Company's revenues declined. Cumulative revenues from 2016-2018 totalled $27.604 million.
The litigation with NI was settled in July 2018 and the distribution arrangement with NI was cancelled as part of the settlement. See "Item 8 - Legal Proceedings." Since the settlement with NI, the Company has continued to move forward with its business operations. It has developed new strategic relationships and a new strategic business plan, building on its historical success of bringing commercial products to market.
Product Lines
Pharmaceutical
The Company's lead pharmaceutical product is Anvirzel®. Anvirzel® is intended to treat certain forms of cancer; however, it has not yet been approved in the United States or Canada for such purpose. In 2001, a Phase I study limited to establishing safety and dosage was successfully completed at the Cleveland Clinic in Cleveland, Ohio; however, no further clinical trials have been completed. Anvirzel® has not been approved for sale by the United States Food and Drug Administration (FDA).
Anvirzel® is not a cure for cancer. Its effectiveness has not yet been demonstrated in official clinical trials, and it may or may not have the desired effect of inhibiting the growth of tumors or causing the elimination or reduction of tumors.
Anvirzel® is available as a prescription drug in Honduras, El Salvador and Guatemala through the Salud Integral Clinic, which is operated by Salud Integral SA de C.V., one of the Company's subsidiaries.
In addition to Anvirzel®, Nerium currently has two other marketable pharmaceutical products: Nerium Immune (formerly known as HIviral) and Nerium Viral (formerly known as HEP-viral). Nerium Immune is designed to provide immune support, and Nerium Viral is designed for use as an adjuvant therapy in the treatment of Hepatitis C and other antiviral support.
Skincare
The Nerium AD®, Nerium Advanced, and NeriumRX products were developed by the Company and are currently manufactured by third party companies using Nerium's patented NAE-8® extract. These cosmetic product lines currently include NeriumAD® Night Cream, Nerium Firm, Nerium Advanced Nightly Face Treatment, Nerium Advanced Daily Face Moisturizer, Nerium Firm Advanced Body Cream, Nerium Advanced Eye Serum, NeriumRX® Dermal Pain Relief Therapy (designed for shingles pain relief), NeriumRX® Psoriasis Relief Therapy, NeriumRX® Cold Sore Therapy and NeriumRX® Daily Lip Maintenance. Additional products for these product lines are in development. NeriumRX® products are available from certain distributors and health care providers, as well as at Nerium's online store (www.neriumrx.com and www.neriumskincare.com).
Corporate Organization
NBI was incorporated on June 1, 2006. Through its wholly-owned subsidiary, Phoenix Biotech Ltd. ("Phoenix BVI"), the Company has four Latin American subsidiaries, with the following ownership percentages: 100% ownership of Drogueria Salud Integral S. de R.L., a Honduran corporation ("DSI"), 99.94% ownership of Salud Integral LTDA de C.V., a Honduran corporation ("SI"), 99.909% ownership of Farmacia Salud Integral, S. de R.L., a Honduran corporation ("FSI"), and 91% ownership of Salud Integral de El Salvador LTDA. De. C.V., a Salvadoran corporation ("SIES," and together with DSI, SI and FSI, the "Latin American Subsidiaries").
The Latin American Subsidiaries own the rights in the jurisdictions in which they are formed to market Anvirzel® as a therapeutic agent with activity against cancer and as a non-toxic adjuvant agent when used with traditional chemotherapy and radiotherapy.
The Company also incorporated ten wholly-owned foreign subsidiaries in Australia, Hong Kong, Japan, Singapore, Thailand, Taiwan, Korea, Malaysia, the Philippines, and Mexico (collectively, the "NSC Subsidiaries"). The NSC Subsidiaries were formed for the purpose of obtaining regulatory approval to distribute Nerium's skincare products through NI as part of NI's international expansion strategy. Since the Company has terminated its relationship with NI, the activities of the NSC Subsidiaries have been limited to organizational and regulatory compliance activities, and commercial operations have not commenced.
Distribution of Company Products
The Company's sales of Anvirzel® are conducted through the Latin American Subsidiaries and only in those countries where the sale of Anvirzel® is approved by the regulators in those countries. To date, Anvirzel® sales have been minimal.
Until 2018, the Company was economically dependent on NI given that NI had exclusivity for the marketing and sale of the Company's cosmetic products. The last sales that the Company recorded to NI were in the first quarter of 2019.
In April 2019, the Company executed a marketing/distribution agreement with PURE Gen Holdings, Inc. ("PURE"), pursuant to which PURE served as the exclusive marketing and distribution agent for certain of the Company's cosmetic skincare products. PURE's exclusivity expired on June 1, 2020. While the Company anticipates that it may continue to sell its products through PURE, it is now evaluating other multi-level marketing opportunities.
In 2019, the Company began efforts to establish a direct sales presence in Guadalajara, Mexico for certain of its cosmetic skincare products by selling products to one of the major pharmacies in Mexico. To date, revenue reported by the Company from this initiative has not been material.
Employees
The Company has a total of 37 full time employees in three countries - the United States, Honduras and Mexico. Its senior management team consists of three individuals - the Chief Executive Officer ("CEO"), the Chief Financial Officer ("CFO"), and an Executive Vice President of Operations. The Company also engages the services of outside consultants as necessary to assist the senior management team.
Competition
The Company competes with other businesses that market and sell cosmetic skincare products. This includes other multi-level marketing distributors and companies that sell direct to business and direct to consumer. Sales by such companies include the sale of products over the internet, through radio and TV infomercials and to wholesale and retail customers. Many of those competitors have larger scale of operations and greater financial resources than the Company. The Company believes that it provides a competitive product in this diverse marketplace. However, there can be no assurance that the Company's sales and marketing initiatives will be successful so as to allow the Company to realize scale and profitable operations.
Key Suppliers
In February 2015, the Company completed the purchase of an 18.175% equity interest in Biova LLC, an Iowa limited liability company ("Biova") for $1.2 million. Biova supplies the Company with one of its key ingredients for its line of cosmetic skincare products. The Company has also provided Biova with an $800,000 term loan and has provided certain partial guarantees on Biova's indebtedness. See "Item 2 - Financial Information - Working Capital and Liquidity and Capital Resources."
Other than the supply of the products produced by Biova and SI (to date the production of and sales by SI have been minimal), the Company has no other key suppliers on which it is dependent.
The Company engages several third-party manufacturing companies based in Dallas, Texas to produce its cosmetic skincare products. Over the past decade, it has sourced most of its container and packaging materials from suppliers based in China.
Business and Intangible Asset Acquisitions
The Company owns a 253.6-acre oleander farm located in D'Hanis, Texas and has acquired certain water rights in the adjacent area. See "Item 3 - Properties."
Patents and Trademarks
In 2014, the Company was awarded a process patent by the U.S Patent and Trademark Office ("USPTO") for the extraction of oleandrin using aloe vera. The patent extends until 2029. The Company has also filed a patent application with the USPTO with respect to the use of Anvirzel® in combination with certain chemotherapies.
The Company has registered various trademarks in North America and in other international jurisdictions.
Compliance with Regulations
The Company is required to meet local, municipal, state and federal government regulations with respect to environmental, fair business and labor practices, anti-corruption and anti-bribery legislation. The Company manages these obligations in the normal course of conducting its business. There are no instances of which the Company is aware where it is in violation of such regulations.
The Company has not been involved in any bankruptcy, receivership or other similar proceedings. The Company has not been involved in any material reclassification, merger, or other consolidation of its business affairs since inception.
Litigation with Nerium International Inc.
From August 2015 to July 2018, the Company was engaged in litigation with NI, NI's manager, Jeff Olson, and NI's 70% member, JO Products, LLC. The initial action was filed by the Company on August 15, 2015 in the State District Court for Dallas County, as well as in the United States District Court for the Southern District of New York. NI filed its response and counterclaim in the United States District Court for the Northern District of Texas - Dallas Division on September 15, 2015, and these actions were ultimately consolidated into one action in the United States District Court for the Northern District of Texas. Effective July 26, 2018, the parties entered into a settlement agreement (the "Settlement Agreement") that provided for the settlement of all disputes pending between the parties. Among other things, the Settlement Agreement provided for the payment of $10,000,000 by NI to the Company, of which $6,000,000 was paid on July 26, 2018 with the balance to be paid in equal quarterly installments over a three-year period. NI has since made three quarterly installment payments of $333,333 in October 2018, January 2019 and April 2019 directly to the Company, and four quarterly installment payments of $333,333 in July 2019, October 2019, January 2020 and April 2020 into an escrow account.
Although the litigation was dismissed in July 2018, NI (now known as Neora) filed an Arbitration Demand and Statement of Claim with the American Arbitration Association ("AAA") in April 2019 requesting that all future settlement payments be paid into escrow pending conclusion of the arbitration proceeding. The arbitration is ongoing, and the Company cannot predict the outcome with any certainty. See "Item 8 - Legal Proceedings."
ITEM 1A. RISK FACTORS.
You should carefully consider the following risk factors and the other information included herein as well as the information included in other reports and filings made with the SEC. The following factors, as well as other factors affecting our operating results and financial condition, could cause our actual future results and financial condition to differ materially from those projected.
Risks Related to Our Financial Condition, Capital Requirements and General Business Risks.
We have a recent history of operating losses and expect to incur additional losses in the future until we realize greater commercial revenues.
We have sustained losses which, as of December 31, 2019, accumulated to $1,606,227, including a comprehensive loss attributable to controlling interest of $4,967,307 and $9,160,737 for the years ended December 31, 2019 and 2018, respectively.
Our losses have had, and will continue to have, an adverse effect on our financial condition. Any failure to achieve and maintain profitability will continue to have an adverse effect on our financial condition and results of operations, and may cause us to cease operations.
The consolidated financial statements of our Company have been prepared on a "going concern" basis.
We have prepared our consolidated financial statements on a "going concern" basis which presumes that we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future.
As of December 31, 2019, we had $1,717,464 of cash on hand and our working capital position was $5,098,821. After December 31, 2019 and through the date of this Form 10, we have raised an additional $1,000,000 through the issuance of convertible debentures. See "Item 10 - Recent Sales of Unregistered Securities."
Our ability to continue as a going concern is dependent upon the successful commercialization of our products and we must achieve a profitable level of operations through the commercial sale of our products. We will require additional financing in the interim to fund our activity.
Our consolidated financial statements do not include any adjustments to the amounts and classifications of the assets and liabilities that might be necessary should we be unable to continue in business. If the going concern assumption was not appropriate for our consolidated financial statements, then adjustments would be necessary to the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used. Such adjustments could be material.
We will need additional capital which we may be unable to obtain.
Our capital requirements have been and may continue to be significant. We will require additional funds to develop sales channels and market our products. There can be no assurance that such financing will be available in amounts or on terms acceptable to us, if at all. In either of the aforementioned situations, we may not be able to fully implement our growth plan, if at all.
Even if additional financing is available, the terms of such financing may dilute the percentage ownership interests of our shareholders and may adversely affect our earnings and net book value per share. In addition, we may not be able to secure any such additional financing on terms acceptable to us, if at all. Moreover, if we are unable to obtain such additional capital, we may be required to cease our operations, and may resume our activities only after additional capital is obtained.
The commercial success of our products as well as any other products depends upon the degree of market acceptance by our customers.
In order to achieve a sufficient level of sales to result in profitable operations, our products must be accepted by our customers. We must be successful in our sales and marketing efforts to gain this customer acceptance and our products must be perceived as a cost-effective option compared to competitive alternative products. If our products or any future products do not achieve an adequate level of acceptance we may not generate significant product revenue and may not become profitable.
We may face competition from other companies looking to expand their line of products.
We expect to face competition in every aspect of our business and particularly from other companies that carry the same types of products. The Company competes with other businesses that market and sell cosmetic skincare products. This includes other multi-level marketing distributors and companies that sell direct to business and direct to consumer. Sales by such companies include the sale of products over the internet, through radio and TV infomercials and to wholesale and retail customers. Many of these competitors have larger scale of operations and greater financial resources than the Company. The Company believes that it provides a competitive product in this diverse marketplace. However, there can be no assurance that the Company's sales and marketing initiatives will be successful so as to allow the Company to realize scale and profitable operations.
We may not be able to respond effectively to technological changes in our industry, which could reduce the demand for our products.
Our future business success will depend upon our ability to maintain and enhance our product portfolio relative to advances in technological improvements for products that meet customer needs and market conditions in a cost-effective and timely manner. We may not be successful in developing or gaining access to new products that successfully compete and our customers may not accept one or more of our products. If we fail to keep pace with evolving technological innovations or fail to modify our products and services in response to customers' needs or preferences, then our business, financial condition and results of operations could be adversely affected.
We have specific risks associated with our intellectual property.
Our patented NAE-8 extraction process, which is used in our product formulations, could be challenged by other companies. We may not be successful in the event that our patents are successfully challenged. We may not be successful in receiving patent approvals in foreign jurisdictions where we have filed for provisional patent status. Our trademark registrations in North America and abroad could be successfully challenged by other companies. Should any of these risks materialize, there could be a material adverse effect on the Company's business and financial position.
Disruptions to our information technology ("IT") systems due to cyber-attacks or our failure to upgrade and adjust our information technology systems may materially impair our operations, hinder our growth and materially adversely affect our business and results of operations.
We believe that an appropriate IT infrastructure is important in order to support our daily operations and the growth of our business. If we experience difficulties in implementing new or upgraded information systems or experience significant system failures, or if we are unable to successfully modify our management information systems or respond to changes in our business needs, we may not be able to effectively manage our operations, which may adversely affect our business and results of operations.
Additionally, in the current environment, there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error. We can provide no assurance that the current or future IT systems of the Company, or any of the Company's distributors, are fully protected against third-party intrusions, viruses, hacker attacks, information or data theft or other similar threats.
We currently rely on a limited number of suppliers to produce certain key components of our products.
The Company relies on foreign manufacturers, based in China, for a significant portion of its container and packaging materials. Any disruption or delays in receiving such materials could affect our ability to deliver finished goods to our customers.
The Company also relies on a U.S.-based supplier for a key ingredient in its product formulations. If this supplier is unable to continue to supply this key ingredient, we would have to reformulate certain of our product offerings or seek out other suppliers which could be a difficult and time-consuming process.
The Company has its product formulations manufactured in the U.S. by four different companies. We may need to find additional or more comprehensive manufacturing capacity in order to increase our sales. Failure to do so could have an adverse effect on the growth of our sales.
Additionally, if any of our suppliers fail to comply with FDA regulations, the Company would have to find new suppliers. Disruption in our supply chain could have a potentially adverse impact on the Company's operations and financial condition.
In order to commercialize our future products, we will need to establish a sales and marketing capability.
We currently have limited sales and marketing capability. We will need to add marketing and sales expertise and must also develop the necessary supporting distribution channels. Although we believe we can build the required infrastructure either in-house or through strategic relationships, we may not be successful. Failure to establish a sales force and distribution network would have an adverse effect on our ability to grow our business.
Our success is dependent on our ability to attract and retain dedicated sales agents to solicit end user customers for our products.
Our sales model is heavily dependent on securing a substantial number of independent sales representatives. We do not have a large sales force, and failure to recruit an adequate number of independent sales representatives could have an adverse effect on our business and our financial position.
We may be materially affected by risks associated with new product development.
Our new product development requires us to investigate and evaluate multiple alternatives, as well as plan the design and manufacture of those alternatives selected for further development. Our development efforts could be adversely affected by product development delays, changes in operating systems and changes in industry standards. The manufacturing of new products involves integrating designs and processes, coordinating with suppliers for parts and components and managing manufacturing capacities to accommodate forecasted demand. If we are not successful in meeting these requirements, this could adversely affect our ability to introduce new products on a timely basis.
We have a limited number of senior management team members.
Our senior management team consists of our Chief Executive Officer, our Chief Financial Officer, our Executive Vice President and our senior marketing and sales consultant. If any of our senior management team members or our consultant were to leave the Company, this could adversely affect our business and the results of operations.
In addition, to execute our growth plan, we must attract and retain highly qualified personnel. Competition for these employees exists. New members of management must have significant industry expertise when they join us or engage in significant training which, in many cases, requires significant time before they achieve full productivity. If we fail to attract, train, retain, and motivate our key personnel, our business and growth prospects could be adversely affected.
Furthermore, we are dependent upon our management team to oversee our operations. There can be no assurance that our management team will successfully achieve our business objectives. In the event these persons are ineffective, our business and results of operations could be adversely affected.
We have previously been engaged in a lawsuit with a former distributor of our products; while we have settled the lawsuit, we are currently engaged in a formal arbitration process intended to resolve claims of alleged breach of settlement.
NI has made four quarterly payments totalling $1.34 million into an escrow account representing payments due under the Settlement Agreement through April 2020. An additional $1.66 million of payments are due as quarterly installments through October 2021.
There can be no assurance that the Company will prevail in the arbitration hearings which are currently scheduled for September 2020. If the Company is unsuccessful in the arbitration process, it may be forced to enforce the personal guarantees provided by the majority member of NI, Jeff Olson. There can be no assurance that the Company would, in that case, be successful in enforcing the personal guarantee.
Failure to collect the funds currently in escrow and the remaining installment payments due through October 2021 would have an adverse effect on the Company's business and its financial position. See "Item 8 - Legal Proceedings."
We have foreign subsidiaries and intend to expand our business activity into those jurisdictions.
We are established in multiple foreign jurisdictions. To date, our subsidiaries have largely been inactive. We have committed resources towards establishing business operations in Mexico. In order to successfully build our business and our revenues in foreign jurisdictions, we will be required to add new personnel and devote financial resources to these initiatives. There can be no assurance that such efforts will be successful. Failure to realize on these initiatives could result in adverse effects on our business and results of operations.
There are foreign exchange risks associated with our Company.
Because we have historically raised funds in both U.S. and Canadian markets and a portion of our costs are denominated in Canadian dollars, our funding is subject to foreign exchange risks. A decrease in the value of the U.S. dollar relative to the Canadian dollar could affect our costs and our results of operations. We do not currently hold forward exchange contracts or other hedging instruments to offset potential currency rate fluctuations.
Failure to comply with anti-bribery and anti-money laundering laws could subject us to penalties and other adverse consequences.
We are subject to the U.S. Foreign Corrupt Practice Act of 1977, as amended ("FCPA"), and other anti-corruption, anti-bribery and anti-money laundering laws in the jurisdictions in which we do business, both domestic and abroad. These laws generally prohibit us and our employees from improperly influencing government officials or commercial parties in order to obtain or retain business, direct business to any person or gain any advantage. The FCPA and other applicable anti-bribery and anti-corruption laws also may hold us liable for acts of corruption and bribery committed by our third-party business partners, representatives and agents. In addition to our own sales force, we leverage third parties to sell our products and conduct our business abroad. We and our third-party business partners, representatives and agents could have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and we may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, channel partners and agents, even if we do not explicitly authorize such activities. These laws also require that we keep accurate books and records and maintain internal controls and compliance procedures designed to prevent any such actions. While we have general policies and procedures to address compliance with such laws, we cannot assure you that our employees and agents will not take actions in violation of our policies or applicable law, for which we may be ultimately held responsible. Moreover, violations of anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, imposition of significant legal fees, loss of export privileges, severe criminal or civil sanctions, suspensions or debarment from U.S. government contracts, substantial diversion of management's attention, and an adverse impact on our reputation and business, each of which may have an adverse effect on our results of operations and financial condition.
The COVID-19 pandemic may cause significant disruption to our business model.
On January 20, 2020, the World Health Organization ("WHO") announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the "COVID-19 outbreak") and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in global exposure.
The full impact of the COVID-19 outbreak continues to evolve. Management is actively monitoring the impact on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global attempts to curb its spread, the Company is not yet able to fully estimate the effects of the COVID-19 outbreak on its results of operations, financial condition or liquidity for the 2020 fiscal year. However, if the pandemic continues, it will have an adverse effect. Additionally, the COVID-19 outbreak could have a continued adverse impact on economic and market conditions generally and trigger a period of global economic slowdown, which would impair the Company's ability to raise needed funds and to continue as a going concern.
Risk Factors Related to Farm Operations and Anvirzel®
Climate change, droughts and pestilence could have a negative impact on the Company's oleander farm operations located in D'Hanis, Texas.
The Company's key assets include its 253.6-acre oleander farm which yields the proprietary ingredient for all of the Company's current products. The farm is subject to the effects of climate change, droughts, pestilence and other hazards which are beyond the control of the Company. If the farm operations were compromised as a result of such hazards, there would be an adverse impact on the Company's business and its financial condition. See "Item 3 - Properties."
Anvirzel® is Not a Cure for Cancer.
Anvirzel® is not a cure for cancer. Anvirzel® may or may not have the desired effect of inhibiting the growth of tumors or causing the elimination or reduction of tumors. Effectiveness has not yet been demonstrated in official clinical trials.
Lack of Approval in North American Markets.
While Anvirzel® has been approved for sale in Honduras, El Salvador and Guatemala, the FDA has not approved Anvirzel® for use in the United States. Anvirzel® has also not been approved for sale in Canada or in Mexico by the respective regulatory bodies in those countries.
While we intend to seek FDA and Health Canada approval for some of our Anvirzel® products, there can be no assurance that such approval will ever be granted. Failure to receive such approval may have an impact on our ability to generate revenue from this product line.
Use of Cardiac Glycosides May Cause Unwanted Side Effects.
Possible side effects that may be associated with the administration of a cardiac glycoside, such as Anvirzel®, include allergic reaction, nausea, vomiting and atrioventricular block. Such potential side effects may deter some patients from undergoing treatment with Anvirzel®.
Combining Therapeutic Dosages of Different Cardiac Glycoside Could Be Dangerous.
Cardiac glycosides are well known to be toxic to humans. Overdosing on cardiac glycosides can lead to cardiac arrhythmia, cardiac toxicity and death. Anvirzel® contains cardiac glycosides in sub-therapeutic amounts. Clinical testing on humans and animals has demonstrated Anvirzel® and its cardiac glycoside components are below toxic levels and are safe. However, when used in combination with other cardiac glycosides (such as digoxin for congestive heart failure), Anvirzel® may have a toxic effect due to the patient exceeding the maximum tolerated dosage for cardiac glycosides.
Positive Immune Response Not Independently Proven.
Positive immune response after treatment with our antiviral drugs is based on evidence gathered from internal clinical trials and has not been verified by independent third parties. A positive immune response does not equal a cure. There is no evidence that oleandrin has cured, or has the ability to cure, any viral-related diseases. The Company does not claim that the use of its antiviral drugs will cause a positive immune response.
Lack of Physician Acceptance.
Physician acceptance of a medical product in major markets is driven by physician education through scientific journals and news media, and physicians' experience with treating patients that have chosen to add alternative treatments to their therapies until a product is approved in their respective countries. Because Anvirzel® has not yet been approved by either the FDA or Health Canada, the ability of the Company to educate physicians as to the potential benefits of Anvirzel® is limited.
The Company's Products, including Anvirzel®, May Become Obsolete.
The biotechnology industry has been characterized by the frequent introduction of new products. Accordingly, we may be adversely affected by the new products developed by our competitors. In addition, as the potential benefits of the oleander extract enter the public domain, our competitors may seek to develop, on an expedited basis, products which compete with our products, thereby adversely affecting our business.
Risk Factors Relating to Our Common Shares
The rights of our shareholders may differ from the rights typically afforded to shareholders of a U.S. corporation.
We are incorporated under the Canada Business Corporations Act (the "CBCA"). The rights of holders of our common shares are governed by the applicable laws of Canada, our Articles of Incorporation, and our By-laws. These rights differ in certain respects from the rights of shareholders in typical U.S. corporations. Some notable differences include, but are not limited to, the following:
a. With regard to certain matters, we must obtain approval of our shareholders by way of at least 66 2/3 % of the votes cast at a meeting of shareholders duly called for such purpose being cast in favor of the proposed matter. Such matters include without limitation: (a) the sale, lease or exchange of all or substantially all of our assets out of the ordinary course of our business; (b) any amendments to our Articles including, but not limited to, amendments affecting our capital structure such as the creation of new classes of shares, changing any rights, privileges, restrictions or conditions in respect of our shares or changing the number of issued or authorized shares, and (c) any amendments changing the minimum or maximum number of directors set forth in the Articles. Under U.S. state law, the sale, lease, exchange or other disposition of all or substantially all of the assets of a corporation generally requires approval by a majority of the outstanding shares, although in some cases approval by a higher percentage of the outstanding shares may be required. In addition, under U.S. state law, the vote of a majority of the shares is generally sufficient to amend a company's certificate of incorporation, including amendments affecting capital structure or the number of directors.
b. Pursuant to our By-laws, two persons present in person or represented by proxy and each entitled to vote shall constitute a quorum for the transaction of business at any meeting of shareholders. Under U.S. state law, a quorum generally requires the presence in person or by proxy of a specified percentage of the shares entitled to vote at a meeting, and such percentage is generally not less than one-third of the number of shares entitled to vote.
c. The Company is a reporting issuer in the Province of Ontario and, as such, is subject to Canadian securities laws. Canadian securities laws vary from United States securities laws and impose additional compliance, reporting and other obligations and requirements on the Company to those arising under United States securities laws.
We do not anticipate paying dividends.
We have never paid a dividend on our securities and we do not anticipate paying dividends in the foreseeable future.
We may need to issue additional securities which may cause our shareholders to experience dilution.
Our Board of Directors has the authority to issue additional common shares or other of our securities without the prior consent or vote of our shareholders. The issuance of additional common shares would dilute the proportionate equity interest and voting power of our shareholders.
ITEM 2. FINANCIAL INFORMATION.
Forward Looking Statements
You should read the following discussion of our financial condition and results of operations together with our audited consolidated financial statements and the notes thereto. The following discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Highlights of 2019 fiscal year
The highlights for the fiscal year ending December 31, 2019 include the following business developments:
(a) After the settlement of the NI legal matter in 2018, the Company received quarterly installment payments of $333,333 in October 2018, January 2019 and April 2019 in accordance with the terms of the Settlement Agreement with NI.
(b) NI (now known as Neora) filed an Arbitration Demand in April 2019, and made quarterly installment payments of $333,333 in July 2019, October 2019, January 2020 and April 2020 into an escrow account, pending the final arbitration hearing which is currently scheduled for September 2020.
(c) In April 2019, the Company executed a marketing/distribution agreement with Pure Gen Holdings, Inc. ("Pure") pursuant to which the Company is developing proprietary skincare products for which Pure serves as the exclusive marketing and distribution agent. The agreement stipulates certain performance criteria that Pure was required to meet by June 1, 2020 in order for Pure to retain its exclusive rights. Pure did not fulfill such performance criteria by June 1, 2020, and its exclusivity consequently expired.
(d) The Company continued to fund its operating commitments in 2019 by utilizing its cash on hand. It did not raise additional funds in 2019. It reported a working capital position of $5,098,821 at December 31, 2019 and had minimal long-term liabilities of $125,178.
(e) The Company added two new senior members to its management team: Henry Bourg, as Chief Financial Officer, and Doug Burdick, as a senior consultant to lead the Company's sales and marketing initiatives.
(f) 2019 was a transition year for the Company. It reported sales of $2,976,035 and a net comprehensive loss attributable to controlling interest for the year of $4,967,307. It made a significant additional investment of $2,171,552 in inventory, it spent $83,198 on property, plant and equipment, and it committed $190,229 to additional patent and trademark expenditures. Its cash, including restricted cash on hand, at December 31, 2019 was $1,717,464.
(g) RSM US LLC was appointed as auditors for the Company in 2019, replacing MNP LLC. There were no disagreements between the Company and MNP LLC; the change in auditors was made because the Company believed its long-term interests were better served by this appointment. See "Item 14 - Changes in and Disagreements with Accountant on Accounting and Financial Disclosure."
(h) Subsequent to the fiscal year end, on January 20, 2020, the World Health Organization ("WHO") announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the "COVID-19 outbreak") and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in global exposure. The full impact of the COVID-19 outbreak continues to evolve. Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020. However, if the pandemic continues, it will have an adverse effect. Additionally, the COVID-19 outbreak could have a continued adverse impact on economic and market conditions generally and trigger a period of global economic slowdown, which would impair the Company's operations and financial condition.
Overall Performance
In 2019, Nerium reported a comprehensive loss attributable to controlling interest of $4,967,307 or $0.14 basic loss per common share, compared to $9,160,737 or $0.25 basic loss per common share for fiscal 2018. Sales of skincare products to NI had been Nerium's principal source of revenue until 2019, and Pure accounted for $2,486,029 of revenue in 2019. Revenue from sales during the year ended December 31, 2019 increased by $85,965, while gross profit increased $789,350 compared to the year ended December 31, 2018.
As at December 31, 2019, Nerium had cash, including restricted cash, totaling $1,717,464 compared to $7,123,102 at December 31, 2018. Working capital decreased to $5,098,821 compared to $9,185,398 at December 31, 2018, a decrease of $4,085,577.
Results of Operations
The following table and discussions compare results of Nerium for 2019 versus 2018.
| For the year ending December 31, | Change | |||||||||||
| 2019 | 2018 | $ | % | |||||||||
| Sales | $ | 2,976,035 | $ | 2,890,070 | 85,965 | 3.0 | ||||||
| Other income | 19,862 | 141,674 | (121,812 | ) | (86.0 | ) | ||||||
| 2,995,897 | 3,031,744 | (35,847 | ) | (1.2 | ) | |||||||
| Cost of sales | 2,430,608 | 3,255,805 | (825,197 | ) | (25.3 | ) | ||||||
| Gross profit (loss) | 565,289 | (224,061 | ) | (789,350 | ) | (352.3 | ) | |||||
| Expenses | ||||||||||||
| General and administrative | 5,064,036 | 6,974,183 | (1,910,147 | ) | (27.4 | ) | ||||||
| Depreciation and amortization | 439,730 | 454,555 | (14,825 | ) | (3.3 | ) | ||||||
| Research and development | 100,120 | 226,198 | (126,078 | ) | (55.7 | ) | ||||||
| Stock-based compensation | - | 37,000 | (37,000 | ) | (100.00 | ) | ||||||
| Accretion | - | 2,734 | (2,734 | ) | (100.00 | ) | ||||||
| Impairment loss | - | 2,144,336 | (2,144,336 | ) | (100.00 | ) | ||||||
| 5,603,886 | 9,839,006 | (4,235,120 | ) | (43.0 | ) | |||||||
| Net loss from operations before loss on disposal of assets, accretion of interest income and provision for (recovery of ) income taxes | (5,038,597 | ) | (10,063,067 | ) | 5,024,470 | (49.9 | ) | |||||
| Loss on disposal of assets and assets held for resale | - | 21,458 | (21,458 | ) | (100.0 | ) | ||||||
| Accretion of interest income on related party receivable | (157,018 | ) | (86,910 | ) | (70,108 | ) | 80.7 | |||||
| Net (loss) income before provision for income taxes | (4,881,579 | ) | (9,997,615 | ) | 5,116,036 | (51.1 | ) | |||||
| Provision for (recovery of) income taxes and deferred income tax | 86,077 | (811,193 | ) | 897,270 | (110.6 | ) | ||||||
| Net loss for the year | (4,967,656 | ) | (9,186,422 | ) | 4,218,766 | (45.9 | ) | |||||
| Exchange gain (loss) on translating foreign operations | - | 25,069 | (25,069 | ) | (100.0 | ) | ||||||
| Net comprehensive loss for the year before non-controlling interest | (4,967,656 | ) | (9,161,353 | ) | 4,193,697 | (45.8 | ) | |||||
| Loss attributable to non-controlling interest | (349 | ) | (616 | ) | 267 | (43.3 | ) | |||||
| Comprehensive loss attributable to controlling interest | $ | (4,967,307 | ) | $ | (9,160,737 | ) | $ | 4,193,430 | (45.8 | ) |
Total revenue for the year ended December 31, 2019 was $2,995,897 compared to $3,031,744 for the year ended December 31, 2018.
Cost of sales decreased in fiscal 2019 by $825,197, or 25.3%, mostly as a result of the Nerium farm operational expenses being capitalized to the production of oleander powder in 2019.
Other income for the year ended December 31, 2019 totaled $19,862 compared to $141,674 for the year ended December 31, 2018. Other income comprising rental income derived from leasing a portion of the farm acreage was capitalized to the 2019 production of oleander powder.
Total expenses for the year ended December 31, 2019 were $5,603,886 compared to $9,839,006 for the year ended December 31, 2018, a decrease of $4,235,120 (43.0%).
General and administrative expenses are Nerium's largest expense and, in the past two years, such expenses reflect the level of activity in the litigation against NI. During the year ended December 31, 2019, general and administrative expenses decreased due to the settlement with NI in fiscal 2018. The general and administrative expenses details for the year ended December 31, 2019 and December 31, 2018 are as follows:
| For the year ended, December 31 | Change | |||||||||||
| 2019 | 2018 | $ | % | |||||||||
| Legal | $ | 1,096,015 | $ | 3,919,902 | (2,823,887 | ) | (72.1 | ) | ||||
| Salaries, wages and benefits | 1,659,226 | 1,310,756 | 348,470 | 26.6 | ||||||||
| Marketing | 1,040,414 | 650,424 | 389,990 | 60.0 | ||||||||
| Consulting | 642,871 | 400,184 | 242,687 | 60.6 | ||||||||
| Travel | 312,737 | 115,043 | 197,694 | 171.8 | ||||||||
| Occupancy | 332,582 | 207,981 | 124,601 | 59.9 | ||||||||
| Other | (19,809 | ) | 369,893 | (389,702 | ) | (105.4 | ) | |||||
| Total general and administrative expenses | $ | 5,064,036 | $ | 6,974,183 | (1,910,147 | ) | (27.4 | ) | ||||
Consulting expenses increased by $242,687, or 60.6%, to $642,871 during the year ended December 31, 2019 as the result of engaging sales and marketing professionals to identify and launch new sales channels. Occupancy expenses increased by $124,601, or 59.9%, to $332,582 during the year ended December 31, 2019 as a result of scheduled escalations in monthly office rent and additional expenditure on computer technology and office supplies related to the research and implementation of new sales channels.
Research and development expenses decreased by $126,078, or 55.7%, to $100,120 during the year ended December 31, 2019. Nerium's research and development expenses were focused on antiviral and skin repair products in 2018 as it prepared for new sales markets. The planned skin care launch was completed in 2019; therefore, the related research and development costs declined.
Depreciation and amortization expense decreased by $14,825, or 3.3%, to $439,730 during the year ended December 31, 2019. Amortization of trademarks was relatively consistent with 2018, a decline of $5,116, or 1.8%. Depreciation also decreased as certain equipment became fully depreciated.
In January 2018, Nerium issued stock options to a new member of the board of directors, which vested immediately, resulting in an expense of $37,000, representing the fair value of the options granted. There was no expense for stock-based compensation in 2019.
Nerium recorded a net loss of $nil and $21,458 on the disposal of assets in 2019 and 2018, respectively. The gross loss of $40,000 from the disposal of an asset held for resale in fiscal 2018 was offset by a gain of $18,542 related to the trade-in of older farm equipment for new equipment.
Nerium recorded impairment losses of $2,144,336 in 2018 versus $nil in 2019. The components of the 2018 impairment loss were:
| Write-off of net investment income in NI | $ | 1,472,689 | |
| Write-off of net investment in supplier | 644,719 | ||
| Abandonment of patent applications | 26,928 | ||
| $ | 2,144,336 |
Nerium had its interest in NI redeemed as of December 31, 2018, pursuant to the Settlement Agreement, which included $6 million paid on the effective date of the Settlement Agreement, $4 million to be paid in equal quarterly installments over a three-year period beginning on October 25, 2018, and settlement of the pricing adjustment provision net of outstanding receivables. The net result, detailed in the following table, resulted in an impairment loss of $1,472,689:
| Carrying value of equity investment at December 31, 2017 | $ | 12,243,593 | |
| Redemption of residual interest - cash received | (6,000,000 | ) | |
| Redemption of residual interest - receivable | (3,650,027 | ) | |
| Settlement of pricing adjustment provision | (7,759,536 | ) | |
| Settlement of accounts receivable | 6,638,659 | ||
| Impairment loss | $ | 1,472,689 |
Pursuant to the Settlement Agreement with NI, Nerium recognized interest income of $157,017 during the year ended December 31, 2019 compared to $86,910 in 2018. This income is a non-cash item and is recognized in the $3,650,025 receivable recorded in 2018 as it accretes to the face value of $4 million over its three-year term.
In 2015, Nerium purchased an 18.175% equity investment in a supplier, Biova LLC ("Biova"), which investment was recorded using the equity method. Nerium ceased purchasing product from Biova in 2016 in response to the lower demand of products from NI, and as Biova began recording losses, Nerium recorded its proportionate share of the loss. Nerium reported a loss on its equity investment in Biova of $524,913 for the year ended December 31, 2017. At December 31, 2017, Nerium determined that it was no longer able to exercise significant influence over Biova, and at that point in time, it adopted the cost method to report its residual interest in Biova. Thereafter, Nerium opted to forgo cash contributions required to maintain its investment percentage which, as a result, declined to 15.53% as of December 31, 2019.
Under the cost method of accounting, the fair value of this investment is assessed at each reporting date. At December 31, 2018, Nerium determined that the full carrying value of its residual interest in Biova had become impaired due to an absence of an ability to recover the carrying amount of the investment and the inability of Biova to sustain an earnings capacity which would justify the carrying amount of the investment. Accordingly, Nerium recorded an impairment loss totaling $644,719 for the year ending December 31, 2018.
Nerium realized a gain of $10,950 and $25,069 on the exchange difference on translating foreign operations for the years ending December 31, 2019 and 2018, respectively. These amounts reflect the normal fluctuations in the value of the foreign currencies. During the year ended December 31, 2019, Nerium's management determined that its Central American subsidiaries were dependent on Nerium as its parent company. Accordingly, the gain of $10,950 in 2019 was recorded as net operating income rather than as other comprehensive income.
Nerium recognized a loss attributable to non-controlling interests in one of its subsidiaries of $349 and $616 for the years ending December 31, 2019 and 2018, respectively.
Accordingly, Nerium recognized a comprehensive loss attributable to controlling interest of ($4,967,307), or $0.14 per basic common share, for the year ended December 31, 2019, which represents a decrease of $4,193,430 compared to loss attributable to controlling interest of $$9,160,737, or $0.25 per basic per basic common share, for the year ended December 31, 2018.
Working Capital
The following table provides information on Nerium's working capital balances as at December 31, 2019 and 2018:
| December 31 | December 31, | Change | Change | |||||||||
| 2019 | 2018 | $ | % | |||||||||
| Cash and cash equivalents | $ | 1,548,765 | $ | 7,089,268 | $ | (5,540,503 | ) | (78.2 | ) | |||
| Restricted cash, current | 64,533 | 13,834 | 50,699 | 366.5 | ||||||||
| Accounts receivable | 418,894 | 1,163 | 417,731 | 35,918.4 | ||||||||
| Accounts receivable from related party | - | 2,644 | (2,644 | ) | (100.0 | ) | ||||||
| Inventory | 2,723,038 | 551,486 | 2,171,552 | 393.8 | ||||||||
| Prepaid expenses and deposits | 250,632 | 210,467 | 40,165 | 19.1 | ||||||||
| Receivable from related party--current | 1,255,363 | 1,198,855 | 56,508 | 4.7 | ||||||||
| Income taxes receivable | - | 861,688 | (861,688 | ) | (100.0 | ) | ||||||
| Total current assets | $ | 6,261,225 | $ | 9,929,405 | $ | (3,668,180 | ) | (36.9 | ) | |||
| Accounts payable | 672,981 | 192,384 | 480,597 | 249.8 | ||||||||
| Accrued liabilities | 306,516 | 197,306 | 109,210 | 55.4 | ||||||||
| Contract liability | 147,151 | 263,517 | (116,366 | ) | (44.2 | ) | ||||||
| Guarantee of indebtedness of cost method investee | 19,415 | 90,800 | (71,385 | ) | (78.6 | ) | ||||||
| Current portion of notes payable | 16,341 | - | 16,341 | n/a | ||||||||
| Total current liabilities | $ | 1,162,404 | $ | 744,007 | $ | 418,397 | 56.2 | |||||
| Net working capital | $ | 5,098,821 | $ | 9,185,398 | $ | (4,085,577 | ) | (44.2 | ) |
As at December 31, 2019, working capital was $5,098,821 compared to $9,185,398 as at December 31, 2018. Cash, including restricted cash, decreased by $5,405,638 to $1,717,464 in 2019, as the Company used its cash resources to finance net losses in 2019.
Nerium used cash totaling $5,865,387 in operations in fiscal 2019 compared to $5,385,585 during fiscal 2018.
Income taxes receivable decreased by $861,688 as Nerium received a refund of income taxes totaling $772,040 in fiscal 2019. The remaining balance of $89,648 was expensed as a component of current year tax expense.
In 2016, Nerium issued a promissory note and loaned $800,000 to Biova, in which it holds an equity interest. The note bears interest at the short-term applicable federal rate per annum, includes a security interest in Biova's accounts receivable and inventory, with a maturity date that was extended to January 1, 2020. The balance of the note receivable and accrued interest at December 31, 2019 is $803,312. The promissory note has also been guaranteed by the major shareholders of Biova.
Nerium recognized an income tax expense of $86,077 in fiscal 2019 and income tax benefit totalling $811,193 in fiscal 2018.
The following table provides a summary of cash Nerium used in investing and financing activities for the years ended December 31, 2019 and 2018:
| December 31, | December 31, | Change | |||||||
| 2019 | 2018 | $ | |||||||
| Cash flow utilized in operating activities | $ | (5,685,387 | ) | $ | (5,385,585 | ) | $ | (299,802 | ) |
| Cash flow utilized in investing activities | |||||||||
| Purchase of property, plant and equipment | (83,198 | ) | (1,000 | ) | (82,198 | ) | |||
| Additions to patents and trademarks | (190,229 | ) | (131,764 | ) | (58,465 | ) | |||
| Receipts from receivable from related party | 666,666 | 333,333 | 333,333 | ||||||
| Proceeds from redemption of equity investment | - | 6,000,000 | (6,000,000 | ) | |||||
| Net cash flows utilized in investing activities | 393,239 | 6,200,569 | (5,807,330 | ) | |||||
| Cash flow from (utilized in) financing activities | |||||||||
| Issuance of notes payable | 83,198 | - | 83,198 | ||||||
| Repayment of notes payable | (11,732 | ) | (880,817 | ) | 869.085 | ||||
| Repayment of capital lease obligation | (4,956 | ) | (99,548 | ) | 94,592 | ||||
| Net cash flows utilized in financing activities | 66,510 | (980,365 | ) | 1,046,875 | |||||
| Effect of exchange rate changes on cash and cash equivalents | - | 25,069 | (25,069 | ) | |||||
| Decrease in cash and cash equivalents | (5,405,638 | ) | (140,312 | ) | (5,265,326 | ) | |||
| Cash and cash equivalents and restricted cash, beginning of the period | 7,123,102 | 7,263,414 | (140,312 | ) | |||||
| Cash and cash equivalents and restricted cash, end of the period | $ | 1,717,464 | $ | 7,123,102 | $ | (5,405,638 | ) |
Nerium had its membership interest in NI redeemed in July 2018 and received $6 million cash proceeds.
Nerium purchased farm and office equipment in fiscal 2019 for $83,198; the purchase in 2018 was the balance due after older equipment was traded in for new equipment. Investments in patents and trademarks totaled $190,229 compared to $131,764 for the years ended December 31, 2019 and 2018, respectively.
Nerium made payments totaling $66,510 and $980,365 on notes payable and capital leases obligations during the years ended December 31, 2019 and 2018, respectively. A balloon payment of $880,817 on Nerium's note payable was made on its due date of January 2, 2018, which repaid the note in full. Further, a balloon payment of $80,000 on Nerium's capital lease obligation was made on its due date of July 2, 2018, which repaid that obligation in full.
Liquidity and Capital Resources
Working Capital: As at December 31, 2019, Nerium reports cash, cash equivalents and restricted cash of $1,717,464. Cash equivalents of $428,777 are held in a money market fund, earning a variable rate of market interest. Nerium also reports inventory of $2,723,038. The inventory levels at December 31, 2019 are sufficient to meet current customer delivery requirements.
As at December 31, 2019, Nerium held a receivable from NI totaling $2,893,953, net of discount. Quarterly payments of $333,333 are due from NI totaling $1,333,333 in 2019, $1,333,334 in 2020, and $666,667 in 2021. NI made quarterly payments of $333,333 to the Company in October 2018, January 2019 and April 2019. In August 2019, NI received an emergency ruling from arbitration allowing NI to make the quarterly payments into escrow pending the outcome of arbitration for alleged breach of settlement. Accordingly, NI has since made quarterly installment payments of $333,333 into escrow in July 2019, October 2019, January 2020 and April 2020.
Contractual Obligations: The following is a table of Nerium's contractual obligations as at December 31, 2019:
| Payments Due by Period | |||||||||||||||
| 1-2 years | 2-3 years | 3-4 years | 4-5 years | Total | |||||||||||
| Capital Lease Obligations | $ | 12,695 | $ | 10,161 | $ | 1,187 | $ | - | $ | 24,043 | |||||
| Operating Leases | 55,501 | - | - | - | 55,501 | ||||||||||
| Purchase Obligations | 672,981 | - | - | - | 672,981 | ||||||||||
| Total Contractual Obligations | $ | 741,177 | $ | 10,161 | $ | 1,187 | $ | - | $ | 752,525 | |||||
Guarantees provide by Nerium:
(a) On December 18, 2015, the Company guaranteed 18.175% - its then proportionate share of Biova's line of credit - of up to $500,000. The line of credit is secured by Biova's accounts receivable and inventory and has since been renewed until January 1, 2020. At December 31, 2019, the outstanding balance of Biova's line of credit is $427,000.
(b) In 2014, the Company provided a partial guarantee to support Biova's equipment capital lease financing provided by a bank. The guarantee provided was to the extent of 27% of Biova's lease obligations. At December 31, 2019, Biova's indebtedness to the bank was $1,814,455 compared to $2,397,132 in 2018.
(c) Biova may request additional capital contributions of cash as equity investments to support its operations. The Company has the right to make no additional capital contributions, which would result in a proportionate dilution of its ownership, or it may make additional capital contributions as requested by Biova. The Company has not made capital contributions since December 2015. Since 2016, no capital contributions have been made by any of the members of Biova, and so the Company's proportionate ownership has remained at 15.53%. During the year ended December 31, 2018, the Company recorded an impairment loss totaling $644,719, representing the full carrying value of its residual interest in Biova due to an inability to recover the carrying amount of the investment and the inability of Biova to sustain an earnings capacity which would justify the carrying amount of the investment.
At December 31, 2019, the amount that the Company is at risk with respect to the combined guarantees of Biova's indebtedness is estimated at $73,067 compared to $90,800 in 2018, which is reflected in the consolidated balance sheet.
Capital Resources:
Nerium's primary objective with respect to its capital management is to ensure that it has sufficient cash resources to maintain its ongoing operations. We include shareholders' equity in the definition of capital.
Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of our Company, is reasonable.
As at December 31, 2019, working capital totaled $5,098,821. Management has taken steps to reduce spending and closely monitors cash, inventory levels and its obligations to ensure that the Company is able to maintain current capacities and fund future activities.
Off Balance Sheet Transactions
The Company has no off balance sheet transactions.
Contractual Commitments
Contingencies
Due to the nature of the skincare products industry, it is possible that during the normal course of business the Company may be subject to claims relating to the use of its products, including products which were previously distributed by NI. Management does not expect that any such claims will have a material adverse effect on the consolidated financial statements.
The Company was involved in litigation with NI between 2016 and 2018 and has since been involved in arbitration with respect to the settlement of the litigation. The NI matter is ongoing, and the Company cannot predict the outcome with any degree of certainty. See "Item 8 - Legal Proceedings."
Guarantees
The Company has provided guarantees against a line of credit and certain capital lease obligations of Biova. The amount that the Company is at risk with respect to the combined guarantees of Biova's indebtedness is estimated at $73,067 compared to $90,800 in 2018. The primary security that Biova has provided to its lenders is an assignment of its accounts receivable and inventory against its line of credit and an assignment of the equipment and leasehold against its capital lease obligations.
Customer deposits
At December 31, 2019, the Company held a deposit from NI totaling $147,151 compared to $263,517 at December 31, 2018.
Commitments
At December 31, 2019, the Company was committed to operating lease payments for its various premises in the amount of $55,501.
In addition, the Company is committed to the following:
(a) The Company has entered into two separate agreements with Mr. Gustavo Ulloa, a director of the Company. A production and purchasing agreement effective June 2004 entitles Mr. Ulloa to receive $3.25 per vial of Anvirzel® sold to third parties in exchange for the use of certain facilities and production supervision. A consulting agreement effective January 2007 entitles Mr. Ulloa to receive an additional $3.25 per vial of Anvirzel® sold to third parties in exchange for consulting services in relation to the production of Anvirzel®. Both agreements remain in effect for as long as Anvirzel® is produced in Honduras. The amounts paid under these agreements are not significant at this time and are included in cost of sales.
(b) The Company has entered into an agreement which entitles Mr. Amet Genc, who coordinates patient services in relation to Anvirzel®, to receive $125 per vial purchased by patients using his services. The amount paid during the year ended December 31, 2019 was $11,813 (2018 - $29,650) and is included in cost of sales.
(c) Prior to 2004, the Company entered into a consulting agreement with Dr. Anibal Villatoro, which entitles Dr. Villatoro to receive $1.00 per vial of Anvirzel® sold to third parties in Central America and $2.00 per vial for patients coming from countries other than Central America, to a maximum of $20,000 per month. The amounts paid under this consulting agreement are not significant at this time and are included in cost of sales.
(d) During 2011, the Company entered into an agreement with Mr. Donald Smothers, pursuant to which Mr. Smothers is entitled to receive a 5% commission based on a per unit price charged on each product produced for commercial sale to the end customer that was formulated by Mr. Smothers. The agreement expires in 2031. The commission incurred during the year ended December 31, 2019 was $nil (2018 - $2,752) and is included in cost of sales.
(e) On May 5, 2014, the Company entered into an agreement with an employee to continue managing the harvests of the next 1,200,000 pounds of biomass at a price of $2.50 per pound. In September 2019 a harvest of 25,740 pounds of biomass was harvested for which the Company incurred an expense of $64,350.
Financial Instruments
The Company's financial instruments include cash and cash equivalents, accounts receivable, accounts receivable from related party, other receivables, note receivable and interest from related party, accounts payable, accrued liabilities, notes payable, pricing adjustment provision and capital lease obligation. As at December 31, 2019, the carrying value of the cash and equivalents, accounts receivable, accounts payable, and accrued liabilities approximates their fair value because of the short-term maturities of these items. The carrying value of the accounts receivable from related party and capital lease obligation approximates their fair value as there has not been any significant changes in interest rates since initial recognition. The fair value of the cost method investment is not practicable to measure as both NI and Biova are private companies and the Company does not have access to timely or verifiable accounting information to enable such an estimate. Fair value disclosures related to equity method investments are not required. As at December 31, 2019, these investments in both NI and Biova were $nil.
Significant Accounting Policies and Critical Accounting Estimates
Reference is made to Note 2 of the Company's consolidated financial statements as of December 31, 2019.
Significant Changes in Accounting Policies and Adoption of New Accounting Standards
Reference is made to Note 2 of the Company's consolidated financial statements as of December 31, 2019.
Going Concern
There are uncertainties related to conditions and events that cast doubt about the Company's ability to continue as a going concern and, ultimately, on the appropriateness of the use of the accounting principles applicable to a going concern. During the year ended December 31, 2019, the Company reported a net comprehensive loss attributable to controlling interest of $4,967,307 (2018 - $9,160,737) and negative cash flow from operations of $5,865,387 (2018 - $5,385,585). The Company's working capital at December 31, 2019 is $5,098,821 (2018 - $9,185,398).
The Company's success depends on the profitable commercialization of its line of skincare products. There is no assurance that the Company will be successful in this regard in the future. Based upon its current operating and financial plans, management of the Company believes that it will have sufficient access to financial resources to fund the Company through fiscal 2020. However, the ability of the Company to continue as a going concern is dependent upon, among other things, its ability to secure additional financing and/or profitably commercialize its products.
The Company's consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of its assets or the classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
On January 30, 2020, the World Health Organization ("WHO") announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the "COVID-19 outbreak") and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date of this Form 10. Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020. However, if the pandemic continues, it will have an adverse effect. Additionally, the COVID-19 outbreak could have a continued adverse impact on economic and market conditions generally and trigger a period of global economic slowdown, which would impair the Company's ability to raise needed funds, its operations, and its ability to continue as a going concern.
If the going concern assumptions were not appropriate for these consolidated financial statements then adjustments would be necessary to the carrying value of assets and liabilities, the reported expenses and the statement of financial position classifications used. Such adjustments could be material.
Subsequent Events
In March 2020 the Company secured $1 million of funding through a convertible debenture financing arranged with Dr. Sadik Al-Bassam, a principal shareholder of the Company. The debenture bears interest at a stated rate of 6% with quarterly interest payments. The holder may elect to convert all or a portion of the outstanding principal balance and all accrued interest owing under the debenture into common shares at a conversion price equal to $0.50 per share. See "Item 10 - Recent Sales of Unregistered Securities."
Under the CARES Act enacted in March 2020, corporations are allowed to carry back net operating losses arising in 2018, 2019 and 2020 to the five prior tax years. The estimated IRS tax refund that the Company is expected to claim by carrying back 2018 and 2019 net operating losses is estimated to be $1,512,994. In April 2020, the Company filed for a refund under the CARES Act by carrying back a net operating loss generated in 2018 to taxable income reported in 2013. The Company is expecting a refund of approximately $618,000 by virtue of the utilization of this loss carry back.
ITEM 3. PROPERTIES.
In January 2015, the Company purchased 253.6 acres of farmland in D'Hanis, Texas for $887,890. The farmland was previously leased to the Company for the production of oleander leaves. Additionally, the Company acquired 120 acre-feet of non-transferable water rights. In January 2015, the Company also acquired 39.333 acre-feet of transferable Edwards Aquifer Water for $196,665. These water rights supplement the Company's right to use 120 acre-feet of unrestricted groundwater from the Edwards Aquifer Water that it purchased in 2013 for $666,513.
The Company leases its principal office located at 11467 Huebner Road, Suite 175, San Antonio, Texas. It occupies 3,786 square feet under a 5-year lease which expires in July 2020. The minimum monthly lease obligation is $8,164.
The Company also leases an additional office in Dallas, Texas where certain of its manufacturing and warehousing activities are centered. The Company has signed a 2-year lease expiring in July 2020, with a minimum monthly lease obligation of $1,335.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date of this Form 10, the number and percentage of the outstanding common shares which, according to the information supplied to us, were beneficially owned by (i) each person who is known by us to beneficially own more than 5% of our outstanding common shares, (ii) each director, director nominee and Named Executive Officer; and (iii) all current directors and executive officers as a group.
| Number of Shares | Percent of Outstanding |
Michael Burke, Director | 175,000(b) | 0.48% |
Peter Leininger, Director | 75,000(c) | 0.20% |
Dennis Knocke, President, Chief Executive Officer and Director | 1,014,462(d) | 2.70% |
Gustavo Ulloa, Director | 210,000(e) | 0.57% |
Kerry Mitchell, Director | 50,000(f) | 0.14% |
Dan Amadori, Director | 50,000(g) | 0.14% |
Joseph Nester, Executive Vice President | 793,277(h) | 2.13% |
Lori A. Jones, Former Chief Financial Officer | - | - |
All Directors and Executive Officers as a Group | 3,354,739 | 8.42% |
|
|
|
Principal Shareholder |
|
|
Sadik Al-Bassam Address: Jabriah Block 5, First Street Villa 31, Kuwait City | 3,060,486 | 8.39% |
(a) The business address for each officer and director listed below is: Nerium Biotechnology, Inc., 11467 Huebner Road, Suite 175, San Antonio, Texas.
(b) Total includes currently exercisable option to purchase 175,000 common shares.
(c) Total includes currently exercisable option to purchase 75,000 common shares.
(d) Total includes currently exercisable option to purchase 400,000 common shares.
(e) Total includes currently exercisable option to purchase 60,000 common shares.
(f) Total includes currently exercisable option to purchase 50,000 common shares.
(g) Total includes currently exercisable option to purchase 50,000 common shares.
(h) Total includes currently exercisable option to purchase 550,000 common shares.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The following table sets forth the name, age and position of each of our directors and executive offers as of the date of this From 10. We have a Board of Directors ("Board") comprised of six members. Each director holds office until a successor is duly elected or appointed. Executive officers serve at the discretion of the Board and are appointed by the Board. Also provided herein are brief descriptions of the business experience of each of the directors and officers during the past five years.
Name | Age | Current Position | Date of Appointment |
Michael Burke | 72 | Director | December 14, 2012 |
Peter Leininger | 78 | Director | June 25, 2010 |
Dennis Knocke | 68 | Chief Executive Officer, President, Director | January 17, 2007 |
Gustavo Ulloa | 52 | Director | January 17, 2007 |
Kerry Mitchell | 57 | Director | October 19, 2016 |
Dan Amadori | 68 | Director | December 31, 2017 |
Joseph Nester | 63 | Executive Vice President | January 17, 2007 |
Henry Bourg | 59 | Chief Financial Officer | April 15, 2019 |
Biographical Information
Set forth below are brief biographies of our executive officers and directors.
Michael Burke: Mr. Burke is an independent director and Chair of our Board of Directors. He is a member of the Audit and Governance Committees. Mr. Burke's education includes a bachelor's degree in chemistry from State University of New York and a master's degree from Union College in Schenectady, New York. He began his career at Sterling Drug and in 1992 was named General Manager of Sterling Drug's regional office in Hong Kong with responsibilities for sales, marketing and an entry strategy into China. After the sale of Sterling Drug in 1995, Mr. Burke was employed by Kinetic Concepts, Inc., first as head of Manufacturing and Quality and then as head of Research and Development. During this time, he participated in the sale of the company to private investors and later took part in taking it public again. After retiring from Kinetic Concepts Inc. in 2007, Mr. Burke opened Burke and Company, a private metal fabrication company located in San Antonio, Texas.
Dr. Peter Leininger: Dr. Leininger is an independent director who serves on our Audit and Governance Committees. Dr. Leininger's education includes a Medical Degree from Indiana University. After practicing medicine for 10 years, Dr. Leininger became the Executive Vice President of Kinetic Concepts, Inc., a private company that he helped grow to become a large public company. Dr. Leininger has also partnered in the development of Canyon Springs Residential Development and Golf Course as well as numerous other real estate ventures.
Dennis R. Knocke: Mr. Knocke serves as a director, as well as the Company's President and Chief Executive Officer. Mr. Knocke performs all of the executive management functions commensurate with his position, and also coordinates product research and product development. He has been in this position since 2007. From January 2000 to December 2006, Mr. Knocke served in an executive management position with Phoenix Biotechnology, Inc., and in such capacity was responsible for, among other things, creation of Phoenix's Latin American operations. Prior to his employment by Phoenix Biotechnology, Mr. Knocke successfully founded and operated several start-up healthcare companies that were ultimately the subject of successful acquisition transactions.
Gustavo A. Ulloa Jr: Mr. Ulloa serves as a director of the Company. Mr. Ulloa is an owner and the General Manager and Director of Laboratories Francelia, a pharmaceutical laboratory and manufacturing facility located in Honduras, Central America. He is based in Honduras, where the Company produces and markets Anvirzel®. He has a deep understanding of the pharmaceutical industry and currently serves on the board of Honduras Pharmaceutical Laboratories Manufacturing Association. In his role with Laboratories Francelia, Mr. Ulloa oversees all manufacturing, licensing, legal compliance, research and development, intellectual property management and protection, commercial agreements, as well as activities related to business development and expansion. He is also currently involved in representing Honduras in trade negotiations relating to pharmaceutical and over-the-counter products in Central America.
Kerry Mitchell: Ms. Mitchell serves as an independent director and is Chair of our Governance Committee. She also serves as a member of the Audit Committee. Ms. Mitchell graduated from the Tuck School of Business at Dartmouth College in Hanover, New Hampshire and completed the Tuck Executive Program in 2012. Ms. Mitchell, having served in Vice President, Publisher, and Chief Operating Officer positions, is a much sought after featured speaker in Canada and the United States on topics including media, leadership, branding, marketing to women, and women in business. She provides extensive experience as a media executive with a strong record of building and transforming multi-platforms that include some of the most iconic names in Canadian publishing.
Dan Amadori: Dan Amadori serves as an independent director and as Chair of the Audit Committee. Mr. Amadori has many years of experience in the financial services sector and in corporate governance. After graduating from the Ivey School of Business in 1974, he joined Arthur Andersen in their Toronto office. He spent the next 12 years with Arthur Andersen during which time he practiced in audit, tax, turnarounds, restructurings and mergers and acquisitions. In 1986 he assumed the operating role of President of the Kessler Group of Companies, a private communications business that serviced the advertising sector across Canada. In 1988 Mr. Amadori founded Lamerac Financial Corp. as a mid-market financial advisory services firm. He continues to serve as its President. Since inception, Lamerac has completed numerous transactions across North and South America and in Europe. Over the past two decades, he has served as a director - officer on numerous boards of public, private and not for profit organizations. From June 2016 through May 2019, he served as a Director of Invesque Inc. (TSE:INVQ)(formerly Manstreet Health Investments). He also served as a member of its Investment Committee from May 2016 to May 2018 and as Chair of its Governance Committee from May 2018 to May 2019. Since July 2005 through the present, Mr. Amadori serves as Chief Financial Officer of Micromem Technologies Inc. (CSE:MRAM) (OTCQB:MMTIF).
Joseph Nester: Mr. Nester is our Executive Vice President and Secretary-Treasurer. He previously served as the Chief Financial Officer of the Company between May 2008 and May 2015. He graduated from the University of Texas at Austin with a BBA in General Business. He has over 23 years of experience in the financial service industry as well as four years of experience with a start-up pharmaceutical company, where he was initially the Secretary-Treasurer and after four months was named the President. During this time, he led Anvirzel® in a successful Phase I clinical study, implemented a Compassionate Use Investigational New Drug program, and had direct involvement with the FDA, among other regulatory agencies.
Henry Bourg, CPA, and MBA: Mr. Bourg is our Chief Financial Officer. He is an accomplished senior finance and accounting professional with over thirty-five years of experience with start-ups, mid-sized companies and multi-billion dollar global organizations. He started his career with Ernst & Young in Texas and later in Maryland and New York. While with Ernst & Young, he primarily served financial institution clients such as American General Life Insurance, Capital One and MBNA America Bank. In addition to his public accounting experience, Henry has served in senior finance and accounting roles with the U.S. government in Europe; The Shaw Group, Inc., Chicago Bridge & Iron, and Westinghouse Electric Company in Asia; Inktomi Corporation and Bookham, Inc. (now Oclaro) as well as several technology start-ups in Silicon Valley. He earned his Bachelor of Science degree in Accounting from Louisiana State University and a Master of Business Administration from Santa Clara University.
There are no family relationships among or between any of our officers and directors. None of directors are involved in any legal proceedings as described in Item 401(f) of Regulation S-K.
ITEM 6. EXECUTIVE COMPENSATION.
Our Board is responsible for establishing the compensation and benefits for our executive officers. The Board reviews the performance and total compensation package for our executive officers and considers the modifications of existing compensation and the adoption of new compensation plans. The Board has not retained any compensation consultants.
Summary Compensation Table
The following table sets forth, for the two years ended December 31, 2019 and 2018, information concerning compensation earned by our Named Executive Officers.
Name and Principal | December | Salary | Bonus ($) | Stock | Option | All Other | Total ($) |
Dennis Knocke, | 2019 | 190,000 | 1,000 | - | - | - | 191,000 |
2018 | 160,000 | 10,000 | - | - | - | 170,000 | |
Joseph Nester, | 2019 | 190,000 | 10,000 | - | - | - | 191,000 |
2018 | 160,000 | 10,000 | - | - | - | 170,000 | |
Henry Bourg, | 2019 | 109,375 | - | - | - | - | 109,375 |
2018 | - | - | - | - | - | - | |
Lori A. Jones, | 2019 | 51,667 | 10,000 | - | - | - | 61,667 |
2018 | 140,950 | - | - | - | - | 140,950 |
(a) Dennis Knocke has served as Chief Executive Officer since the Company commenced operations in May 2008.
(b) Joseph Nester served as Chief Executive Officer of the Company from May 2008 to May 2015. He has served as Executive Vice President since May 2015.
(c) Hank Bourg joined the Company on April 15, 2019 as Chief Financial Officer.
(d) Lori A. Jones served as the Company's Chief Financial Officer from May 1, 2015 to April 15, 2019 when she retired.
Employment Agreements
The Company has employment agreements with Dennis Knocke, our Chief Executive Officer, and with Joseph Nester, our Executive Vice President. Each of these agreements provide for a base salary of $230,000, a discretionary performance-based bonus of up to 100% of the base salary, customary non-competition provisions, and in the event of a change of control, severance of up to 24 months.
Compensation of Directors
The following table sets forth information concerning compensation for services rendered to the Company by our directors during 2019 and 2018.
Name | December 31 | Option | Director | Total ($) |
Michael Burke (a) | 2019 | - | 23,940 | 23,940 |
2018 | - | 26,880 | 26,880 | |
Peter Leininger (b) | 2019 | - | 23,370 | 23,370 |
2018 | - | 26,240 | 26,240 | |
Dennis Knocke (c) | 2019 | - | - |
|
2018 | - | - |
| |
Gustavo Ulloa (d) | 2019 | - | 20,911 | 20,911 |
2018 | - | 23,547 | 23,547 | |
Kerry Mitchell (e) | 2019 | - | 23,370 | 23,370 |
2018 | - | 26,240 | 26,240 | |
Dan Amadori (f) | 2018 | 37,000 | 25,071 | 62,071 |
2019 | - | 23,370 | 23,370 |
(a) Mr. Burke serves as Chair of the Board of Directors. He also serves as a member of the Audit and Governance Committees.
(b) Mr. Leininger serves as a Director and as a member of the Audit and Governance Committees.
(c) Mr. Knocke serves as the Company's Chief Executive Officer and as a member of the Board of Directors. He is a non-voting ex-officio member of the Audit and Governance Committees. Mr. Knocke does not receive any compensation for his service as a Director.
(d) Mr. Ulloa serves as a Director of the Company.
(e) Ms. Mitchell serves as a Director of the Company, as Chair of the Governance Committee, and as a member of the Audit Committee.
(f) Mr. Amadori serves as a Director of the Company and as Chair of the Audit Committee.
Stock Option Plans
The Company has two stock option plans. In the 2006 Incentive Stock Option Plan, the Company reserved 3,128,000 common shares for issuance to employees. In the Non-Qualified Stock Option Plan, the Company reserved 3,128,000 common shares for issuance to directors and consultants. The terms of the awards under both plans are determined by the Board. To date, all stock option grants immediately vest and are exercisable for ten years from the date of grant.
Outstanding Equity Awards at Fiscal Year-End
The table below summarizes the outstanding equity awards to our Named Executive Officers as of December 31, 2019.
Name | Number of | Number of | Equity | Option Exercise | Option |
Dennis Knocke | 200,000 | - | - | 1.00 | 12/15/22 |
200,000 | - | - | 2.00 | 05/01/23 | |
Joseph Nester | 200,000 | - | - | 1.00 | 12/15/22 |
200,000 | - | - | 2.00 | 05/01/23 | |
150,000 | - | - | 2.00 | 12/05/23 | |
Henry Bourg | - | - | - | - | - |
Lori A. Jones | - | - | - | - | - |
Equity Compensation Plan Information
This table provides information about common shares that may be issued under our equity compensation plans approved by the shareholders and, to the extent applicable, plans not approved by shareholders as of December 31, 2019.
| Plan Category | Number of Securities | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a) (c) | |||||||
| Equity compensation plans approved by security holders | 2,015,000 | $ | 1.49 | 4,241,000 | ||||||
| Equity compensation plans not approved by security holders | - | N/A | - | |||||||
| Total | 2,015,000 | $ | 1.49 | 4,241,000 |
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
In March 2020 the Company secured $1 million of funding through a convertible debenture financing arranged with Dr. Sadik Al-Bassam, a principal shareholder of the Company. The debenture bears interest at a stated rate of 6% with quarterly interest payments. The holder may elect to convert all or a portion of the outstanding principal balance and all accrued interest owing under the debenture into common shares at a conversion price equal to $0.50 per share. See "Item 10 - Recent Sales of Unregistered Securities."
ITEM 8. LEGAL PROCEEDINGS.
From August 2015 to July 2018, the Company was engaged in litigation with NI, NI's manager, Jeff Olson, and NI's 70% member, JO Products, LLC. The initial action was filed by the Company on August 15, 2015 in the State District Court for Dallas County, as well as in the United States District Court for the Southern District of New York. NI filed its response and counterclaim in the United States District Court for the Northern District of Texas - Dallas Division on September 15, 2015, and these actions were ultimately consolidated into one action in the United States District Court for the Northern District of Texas.
Effective July 26, 2018, the parties entered into a settlement agreement ("Settlement Agreement") that provided for the settlement of all disputes pending between the parties. Among other things, the Settlement Agreement provided for the payment of $10,000,000 by NI to the Company, of which $6,000,000 was paid on July 26, 2018 and the balance to be paid in equal quarterly installments over a three-year period. As partial consideration for the payments, the Company agreed to the redemption of all of its interests in NI. The Settlement Agreement also included a ten-month transition period during which the Company was required to continue to supply NI with NeriumAD Night, NeriumAD Day, and NeriumAD Firm on agreed terms and to refrain from selling some of its products in specified regions where NI carries on business. The transition period ended on May 31, 2019. On July 26, 2018, the parties also entered into an Omnibus Intellectual Property Assignment and License Agreement (the "IP Agreement"), which, among other things, confirmed the Company's ownership of key trademarks and other intellectual property rights and required NI to "rebrand" to a new name. NI has since "rebranded" to the name Neora. Pursuant to the Settlement Agreement, all litigation between the parties, including litigation in Hong Kong and Mexico, was dismissed. In addition, the Settlement Agreement provided that binding arbitration with the American Arbitration Association ("AAA") would be the exclusive remedy for any disputes between the parties arising under or related to the Settlement Agreement.
In April 2019, Neora commenced an arbitration proceeding with the AAA. In May 2019, the Company asserted counterclaims against Neora in the arbitration. In July 2019, Neora filed a request for emergency relief in the arbitration seeking a ruling that all future settlement payments by Neora to the Company may be paid into escrow until the conclusion of the arbitration proceeding. In August 2019, the AAA appointed an interim arbitrator to hear Neora's request for emergency relief, and the interim arbitrator granted Neora's request. Neora subsequently made two quarterly installment payments of $333,333, representing the amount due to the Company on July 25, 2019 and October 25, 2019, into escrow in the total amount of $666,666 and additional payments of 333,333 in January 2020 and April 2020. In October 2019, the Company filed an arbitration demand and statement of claim against Jeff Olson and JO Products, LLC seeking payment in full of the outstanding settlement under the separate guarantee executed by Jeff Olson and JO Products, LLC. On April 23, 2020, the arbitrator rendered a ruling affirming Neora's emergency relief, while affirming the owners of Neora's unconditional guarantee of payment to the Company should Neora not remit the final payments under the Settlement Agreement, including amounts currently held in escrow regardless of the final ruling on the breach of contract arbitration currently on-going (and expected to be resolved in September 2020 following a scheduled hearing).
In July 2019, the Company filed a Complaint and Application For Temporary Restraining Order And Preliminary Injunction in Aid of Arbitration (the "Complaint") in the United States District Court for the Northern District of Texas alleging that Neora has violated the Lanham Act, 15 U.S.C. Sec. 1125(a) for false advertising including the use of at least twenty-three misleading before and after photos of customers showing results allegedly obtained from use of Neora's new skincare products. Within 24 hours of the Company's filing of the Complaint, Neora began deleting the alleged false advertisements that were the subject of the Complaint and promised to not use those advertisements in the future. Accordingly, on August 12, 2019, the Company dismissed the Complaint without prejudice but will continue to pursue non-injunctive relief (i.e., money damages) in arbitration. The arbitration has been set for hearing in September 2020.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common shares are not listed on any exchange in the United States or Canada. There is no active trading of the Company's common shares.
Holders
Our Articles of Incorporation authorizes the issuance of an unlimited number of common shares and an unlimited number of non-voting preferred shares. As of the date of this Form 10, there were 1,100 shareholders of record holding an aggregate of 36,469,181 common shares. This number does not include shareholders who hold their shares through brokers, banks and other nominees. No preferred shares have been issued.
Transfer Agent
The transfer agent for our shares is TSX Trust Company, 301 - 100 Adelaide Street West, Toronto, Ontario, Canada M5H 4H1.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
In March 2020, the Company secured $1 million of financing from Dr. Sadik Al-Bassam, a principal shareholder of the Company. The transaction was structured as an unsecured convertible debenture. The term of the debenture was for 5 years, the interest rate was 6% per annum, payable on a quarterly basis in arrears. The conversion price was set at $0.50 per common share. The debenture was issued in reliance on Section 4(a)(2) of the Securities Act for the exemption from registration thereunder.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
General
We are registering our common shares, the terms of which are described below.
Each holder of our common shares will be entitled to one vote for each share on all matters to be voted upon by the common shareholders, and there will be no cumulative voting rights. To be elected in an uncontested election for Board members, a director must receive more votes "for" than "against" by shares present in person or by proxy and entitled to vote. In a contested election for Board members, the Board members are elected by a plurality of shares present in person or by proxy and entitled to vote.
Subject to any preferential rights of any outstanding preferred shares, holders of our common shares will be entitled to receive rateably the dividends, if any, as may be declared from time to time by the Board out of funds legally available for that purpose. If there is a liquidation, dissolution or winding up of the Company, holders of our common shares would be entitled to a ratable distribution of the Company's assets remaining after payment in full of liabilities and any preferential rights of any then outstanding preferred shares.
Holders of our common shares will have no pre-emptive or conversion rights or other subscription rights, and there are no redemption or sinking fund provisions applicable to our common shares. After the distribution, all outstanding common shares will be fully paid and non-assessable. The rights, preferences and privileges of the holders of our common shares are subject to, and may be adversely affected by, the right of the holders of any series of any preferred shares that the Company may designate and issue in the future.
Preferred Shares
The Board is authorized, by the Company's Articles of Incorporation, to issue an unlimited number of non-voting preferred shares in one or more series without further action by the holders of its common shares. The Board will have the discretion, subject to limitations prescribed by the Articles of Incorporation, to determine the rights, preferences, privileges and restrictions, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred shares.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Bylaws provide that the Company shall indemnify our directors and officers against expenses (including attorney's fees), judgements, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was a director or officer of the corporation. In general, our officers and directors may be indemnified with respect to actions taken in good faith and in a manner that they reasonably believed to be in the best interest of the Company, and, in the case of a criminal proceeding, had no reasonable cause to believe his conduct was unlawful.
The indemnification provisions in our bylaws may discourage shareholders from bringing a lawsuit against directors for breach of their fiduciary duty. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit our shareholders. In addition, shareholders may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. We believe that the indemnification provisions in our Articles of Incorporation, as amended, are necessary to attract and retain qualified persons as directors and officers.
We maintain a policy of directors' and directors' liability insurance that insures its directors and officers against the cost of defense, settlement or payment of a judgement under any circumstances.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company are set forth below in "Item 15 - Financial Statements and Exhibits." The consolidated financial statements do not include an auditor's report, as the audit has not yet been completed. Upon completion, the Company will file the auditor's report in an amendment to this Form 10.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On December 20, 2019 the Company dismissed MNP LLP ("MNP") which was previously engaged as the principal accountant to audit the Company's financial statements. MNP served as auditors for fiscal years ended December 31, 2013 through December 31, 2018, and was reappointed for the fiscal year ended December 31, 2019 at the 2018 Annual General Meeting of shareholders held on June 18, 2019.
The report provided by MNP on the Company's financial statements for the fiscal years ending December 31, 2018 and 2017 did not contain an adverse opinion nor a disclaimer of opinion, it was not qualified nor modified as to uncertainty, audit scope or accounting principles. The decision to dismiss MNP was approved by the Company's Audit Committee and its Board. During the fiscal years ended October 31, 2018 and 2017, the Company had no disagreements with MNP on any matters of accounting principles or practices, financial statement disclosures, auditing scopes or procedures. There were no reportable events of the type listed in Item 304(a)(i)(v) of Regulation S-K. MNP was not engaged to perform any services for the Company for any quarterly interim period after December 31, 2018.
On December 20, 2019, the Audit Committee engaged RSM US LLP ("RSM") as the Company's independent registered public accounting firm for the year ending December 31, 2019. During the two most recent fiscal years ended December 31, 2018 and December 31, 2017 and during the subsequent interim period from January 1, 2019 through December 20, 2019, neither the Company nor anyone on its behalf consulted RSM regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements, and neither a written report nor oral advice was provided to the Company that RSM concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issue, or (ii) any matter that was either the subject of a "disagreement" or a "reportable event", each as defined in Regulation S-K Item 304(a)(l)(v), respectively.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
| Nerium Biotechnology, Inc. | ||||||
| Consolidated Balance Sheets | ||||||
| December 31, 2019 and 2018 | ||||||
| 2019 | 2018 | |||||
| Assets | ||||||
| Current assets | ||||||
| Cash and cash equivalents | $ | 1,548,765 | $ | 7,089,268 | ||
| Restricted cash, current | 64,533 | 13,834 | ||||
| Accounts receivable | 418,894 | 1,163 | ||||
| Accounts receivable from related parties | - | 2,644 | ||||
| Inventories | 2,723,038 | 551,486 | ||||
| Prepaid expenses and deposits | 250,632 | 210,467 | ||||
| Receivable from related party, current | 1,255,363 | 1,198,855 | ||||
| Income taxes receivable | - | 861,688 | ||||
| Total current assets | 6,261,225 | 9,929,405 | ||||
| Other assets | 9,541 | 43,290 | ||||
| Restricted cash | 104,166 | 20,000 | ||||
| Patents and trademarks | 2,007,018 | 2,090,051 | ||||
| Property, plant and equipment | 4,340,051 | 4,558,741 | ||||
| Right-of-use asset, operating leases | 55,501 | - | ||||
| Receivable from related party | 803,312 | 805,311 | ||||
| Note receivable and interest from related party | 1,638,591 | 2,204,747 | ||||
| Intangible assets | 863,178 | 863,178 | ||||
| Total assets | $ | 16,082,583 | $ | 20,514,723 | ||
| Liabilities | ||||||
| Current liabilities | ||||||
| Accounts payable | $ | 672,981 | $ | 192,384 | ||
| Accrued expenses and other current liabilities | 306,516 | 197,306 | ||||
| Contract liability | 147,151 | 263,517 | ||||
| Guarantee of indebtedness of investee, current | 19,415 | 90,800 | ||||
| Current maturities of long-term debt | 16,341 | - | ||||
| Total current liabilities | 1,162,404 | 744,007 | ||||
| Long-term debt, less current maturities | 55,125 | - | ||||
| Guarantee of indebtedness of investee | 53,652 | - | ||||
| Other long-term liabilities | 16,401 | 8,059 | ||||
| Total liabilities | 1,287,582 | 752,066 | ||||
| Stockholders' equity | ||||||
| Preferred stock, no-par value, unlimited authorized, none issued and outstanding | ||||||
| Common stock, no-par value, unlimited authorized, 36,469,181 (December 31, 2019 - 36,469,181) shares issued and outstanding | 9,586,531 | 9,586,531 | ||||
| Additional paid in capital | 6,844,812 | 6,844,812 | ||||
| Accumulated other comprehensive loss | (14,743 | ) | (14,743 | ) | ||
| Retained earnings (accumulated deficit) | (1,606,227 | ) | 3,361,080 | |||
| Nerium Biotechnology, Inc. stockholders' equity | 14,810,373 | 19,777,680 | ||||
| Non-controlling interest | (15,372 | ) | (15,023 | ) | ||
| Total stockholders' equity | 14,795,001 | 19,762,657 | ||||
| Total liabilities and stockholders' equity | $ | 16,082,583 | $ | 20,514,723 |
The accompanying notes are an integral part of these consolidated financial statements.
| Nerium Biotechnology, Inc. | |||||||
| Consolidated Statements of Operations and Comprehensive Loss | |||||||
| For the years ended December 31, 2019 and 2018 | |||||||
| 2019 | 2018 | ||||||
| Revenue | |||||||
| Sales | $ | 2,976,035 | $ | 2,890,070 | |||
| Other income | 19,862 | 141,674 | |||||
| 2,995,897 | 3,031,744 | ||||||
| Cost of sales | 2,430,608 | 3,255,805 | |||||
| Gross profit (loss) | 565,289 | (224,061 | ) | ||||
| Expenses | |||||||
| General and administrative | 5,064,036 | 6,976,917 | |||||
| Depreciation and amortization | 439,730 | 454,555 | |||||
| Research and development | 100,120 | 226,198 | |||||
| Stock-based compensation | - | 37,000 | |||||
| Impairment loss | - | 2,144,336 | |||||
| 5,603,886 | 9,839,006 | ||||||
| Net loss from operations | (5,038,597 | ) | (10,063,067 | ) | |||
| Loss on disposal of assets and assets held for resale | - | 21,458 | |||||
| Accretion of interest income on related party receivable | (157,018 | ) | (86,910 | ) | |||
| Net loss before provision for income taxes (benefit) | (4,881,579 | ) | (9,997,615 | ) | |||
| Provision for income taxes (benefit) | 86,077 | (811,193 | ) | ||||
| Net loss | (4,967,656 | ) | (9,186,422 | ) | |||
| Exchange gain (loss) on translating foreign operations | - | 25,069 | |||||
| Net comprehensive loss for the year before non-controlling interest | $ | (4,967,656 | ) | (9,161,353 | ) | ||
| Loss attributable to non-controlling interest | (349 | ) | (616 | ) | |||
| Comprehensive loss attributable to Nerium Biotechnology, Inc. | $ | (4,967,307 | ) | $ | (9,160,737 | ) | |
| Basic and diluted net loss per common share | $ | (0.14 | ) | $ | (0.25 | ) | |
| Weighted-average common shares outstanding - basic and diluted | 36,469,181 | 36,469,181 | |||||
| The accompanying notes are an integral part of these consolidated financial statements. | |||||||
| Nerium Biotechnology, Inc. | |||||||||||||||||||||
| Consolidated Statements of Changes in Stockholders' Equity | |||||||||||||||||||||
| For the years ended December 31, 2019 and 2018 | |||||||||||||||||||||
| Common Stock | Additional Paid In Capital | Accumulated Other Comprehensive Loss | Non - Controlling Interest | Retained Earnings (Accumulated deficit) | Total Stockholders' Equity | ||||||||||||||||
| Shares | Amount | ||||||||||||||||||||
| At December 31, 2017 | 36,469,181 | $ | 9,586,531 | $ | 6,807,812 | $ | (39,812 | ) | $ | (14,407 | ) | $ | 12,546,886 | $ | 28,887,010 | ||||||
| Shares issued for stock options exercised | - | - | 37,000 | - | - | - | 37,000 | ||||||||||||||
| Comprehensive loss for the year | - | - | - | 25,069 | (616 | ) | (9,185,806 | ) | (9,161,353 | ) | |||||||||||
| At December 31, 2018 | 36,469,181 | $ | 9,586,531 | $ | 6,844,812 | $ | (14,743 | ) | $ | (15,023 | ) | $ | 3,361,080 | $ | 19,762,657 | ||||||
| Comprehensive loss for the year | - | - | - | - | (349 | ) | (4,967,307 | ) | (4,967,656 | ) | |||||||||||
| At December 31, 2019 | 36,469,181 | $ | 9,586,531 | $ | 6,844,812 | $ | (14,743 | ) | $ | (15,372 | ) | $ | (1,606,227 | ) | $ | 14,795,001 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
| Nerium Biotechnology, Inc. | |||||||
| Consolidated Statements of Cash Flows | |||||||
| For the years ended December 31, 2019 and 2018 | |||||||
| 2019 | 2018 | ||||||
| Cash flow utilized in operating activities | |||||||
| Net loss | $ | (4,967,656 | ) | $ | (9,186,422 | ) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
| Depreciation and amortization of right-of-use asset | 271,967 | 176,177 | |||||
| Depreciation included in cost of sales | 126,213 | 143,647 | |||||
| Accretion expense | - | 2,734 | |||||
| Accretion of interest - related party | (157,018 | ) | (86,910 | ) | |||
| Amortization on patents and trademarks | 273,262 | 278,378 | |||||
| Loss on disposal of assets and assets held for resale | - | 21,458 | |||||
| Impairment loss | - | 2,144,336 | |||||
| Stock-based compensation | - | 37,000 | |||||
| Changes in operating assets and liabilities: | |||||||
| Accounts receivable | (417,731 | ) | 3,024 | ||||
| Receivables from related parties | 4,643 | 186,083 | |||||
| Inventories | (2,171,552 | ) | 835,919 | ||||
| Prepaid expenses and deposits and other assets | (6,416 | ) | 137,235 | ||||
| Accounts payable | 480,597 | (526,983 | ) | ||||
| Accrued expenses | (29,285 | ) | (63,518 | ) | |||
| Contract liability | (116,366 | ) | (1,433 | ) | |||
| Guarantee of indebtedness of investee | (17,733 | ) | - | ||||
| Income taxes receivable | 861,688 | 513,690 | |||||
| (5,865,387 | ) | (5,385,585 | ) | ||||
| Cash flow provided by investing activities | |||||||
| Purchase of property, plant and equipment | (83,198 | ) | (1,000 | ) | |||
| Additions to patents and trademarks | (190,229 | ) | (131,764 | ) | |||
| Receipts from receivable from related party | 666,666 | 333,333 | |||||
| Proceeds from redemption of equity investment | - | 6,000,000 | |||||
| 393,239 | 6,200,569 | ||||||
Nerium Biotechnology, Inc. | |||
Consolidated Statements of Cash Flows (continued) | |||
For the years ended December 31, 2019 and 2018 |
| 2019 | 2018 | |||||||
| Cash flow provided by (utilized in) financing activities | ||||||||
| Proceeds from long-term debt | 83,198 | - | ||||||
| Principal payments on long-term debt | (11,732 | ) | (880,817 | ) | ||||
| Repayment of finance lease obligation | (4,956 | ) | (99,548 | ) | ||||
| 66,510 | (980,365 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | - | 25,069 | ||||||
| Decrease in cash and cash equivalents and restricted cash | (5,405,638 | ) | (140,312 | ) | ||||
| Cash and cash equivalents and restricted cash, beginning of the year | 7,123,102 | 7,263,414 | ||||||
| Cash and cash equivalents and restricted cash, end of the year | $ | 1,717,464 | $ | 7,123,102 | ||||
| Included in cash and cash equivalents and restricted cash is: | ||||||||
| Cash | $ | 1,119,989 | $ | 2,145,153 | ||||
| Restricted deposits | 168,699 | 33,834 | ||||||
| Money market instruments | 428,776 | 4,944,115 | ||||||
| 1,717,464 | $ | 7,123,102 | ||||||
| Supplemental Disclosure: | ||||||||
| Interest paid | $ | 4,122 | $ | 2,665 | ||||
| Income tax refunds received | $ | 763,460 | $ | 940,088 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
Nerium Biotechnology, Inc. |
Notes to the Consolidated Financial Statements |
1. Nature of the Business, Basis of Presentation and Economic Dependence
Nerium® Biotechnology, Inc. (the "Company") was incorporated in Canada on June 1, 2006. The Company is a wholesale manufacturer of skincare/cosmetic and cancer therapeutic products.
Phoenix BVI, a wholly-owned subsidiary of the Company, holds a majority ownership in four Latin American subsidiaries (collectively, "the Latin American Subsidiaries") as follows: 100% ownership of Drogueria Salud Integral S. de R.L. ("DSI"), 99.94% ownership of Salud Integral S.A. de C.V. ("SI"), 99.99% ownership of Farmacia Salud Integral, S. de R.L. ("FSI"), and 91% ownership of Salud Integral de El Salvador LTDA. de. C.V. ("SIES").
The Latin American Subsidiaries were incorporated in Honduras and El Salvador and own the rights in these jurisdictions where they are permitted to market Anvirzel as a therapeutic agent with activity against cancer and as a non-toxic adjuvant agent when used with traditional chemotherapy and radiotherapy.
SI sells Anvirzel, an oleander-based cancer therapeutic, which is administered either by intramuscular injection or sublingually. Anvirzel is not approved by the Food and Drug Administration ("FDA") in the United States or by Health Canada and as such it cannot be marketed outside of three Central American countries as a prescription therapeutic. These countries are Honduras, El Salvador and Guatemala. Steps are being taken to seek a US FDA approval for an oleander extract administered sublingually, but there is no assurance that this approval will ever be granted.
On September 29, 2010, the Company incorporated a wholly-owned subsidiary Nerium SkinCare, Inc. ("NSC"), a Texas corporation. NSC produces skin care cream products. On August 29, 2011, Nerium International, LLC ("NI") commenced operations for which NSC held a 30% interest until July 26, 2018. The Company's relationship with NI, through its wholly-owned subsidiary NSC, was governed by a company agreement ("Company Agreement") that provided for the sale of NSC's skin care cream products exclusively to NI.
From August 2015 to July 2018, the Company and its subsidiary, Nerium Skincare, Inc. ("NSC"), were in litigation with Nerium International ("NI"), NI's manager, Jeff Olson ("Olson"), and NI's 70% member, JO Products, Ltd. Effective July 26, 2018, the parties entered into a settlement agreement ("Settlement Agreement") that provided for the settlement of all disputes pending between the parties. Among other things, the Settlement Agreement provided for the payment of $10,000,000 by NI to NSC, of which $6,000,000 was paid on July 26, 2018 and the balance to be paid in equal quarterly installments over a three-year period. As partial consideration for the payments, NSC agreed to the redemption of all of its interests in NI. The Settlement Agreement also included a ten-month transition period during which NSC was required to continue to supply NI with NeriumAD Night, NeriumAD Day, and NeriumAD Firm on agreed terms and to refrain from selling some of its products in specified regions where NI carries on business. The transition period ended on May 31, 2019. On July 26, 2018, the parties also entered into an Omnibus Intellectual Property Assignment And License Agreement (the "IP Agreement"), which, among other things, confirmed the Company's ownership of key trademarks and other intellectual property rights and required NI to "rebrand" to a new name. NI has since "rebranded" to the name Neora, LLC ("Neora"). As of September 30, 2018, the Company recorded an impairment loss of $1,472,689 on in its investment in NI. Pursuant to the Settlement Agreement, all litigation between the parties, including litigation in Hong Kong and Mexico, was dismissed. In addition, the Settlement Agreement provided that binding arbitration with the American Arbitration Association ("AAA") as the exclusive remedy for any claims between the parties arising under or related to the Settlement Agreement.
Sales to NI have historically been the Company's primary source of revenue and the Company has been economically dependent on these sales. On June 1, 2019, the Company entered an exclusive multi-level marketing agreement with PURE Gen Holdings, Inc. ('PURE") to market and distribute Nerium Identified Products. Accordingly, the Company has created the PURE Nerium line of skincare products to be sold exclusively by PURE which include a Nightly Face Treatment, Daily Face Moisturizer, Firm Body Cream, and Eye Cream and Serum as well as the PURE Nerium Therapy Line. The official launch of this product line occurred in October 2019.
The Company created the Nerium Advanced line of skincare products which include the Nerium Advanced Nightly Face Treatment, Daily Face Moisturizer, NeriumFirm Advanced Body Cream. These products are currently being sold through various on-line venues in Mexico.
The Company has also created the NeriumRX® product line includes Dermal Pain Therapy (shingles pain relief), Psoriasis Relief Therapy, and Cold Sore Therapy. Additional products for this product line are in process. These products are available from certain distributors and health care providers, as well as the Company's online store (www.neriumrx.com and www.neriumskincare.com). In November 2019 the Cold Sore Therapy product was launched through various pharmacies (Farmacias) in Mexico.
Nerium Biotechnology, Inc. |
Notes to the Consolidated Financial Statements |
The Company has seven incorporated wholly-owned foreign subsidiaries in Hong Kong, Singapore, Taiwan, Korea, Malaysia, the Philippines, and Mexico (collectively, "NSC Intl"). The Company commenced operations in Mexico in 2017 but results of operations have not been material. As of December 31, 2019, all other activities of NSC Intl have been limited to organizational and regulatory compliance activities, and commercial operations have not commenced. In order to reduce the expenses of maintaining these subsidiaries, the Company dissolved subsidiaries in Japan, Australia, and Thailand in 2017 and 2018.
The accompanying consolidated financial statements of the Company have been prepared following generally accepted accounting principles in the United States ("US GAAP") and are expressed in United States dollars ("US dollars"), unless otherwise noted. Certain prior year amounts have been reclassified for consistency with the current year presentation.
2. Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries NSC, Phoenix BVI including the majority-owned Latin American subsidiaries, and NSC Intl. The financial statements of the Company's wholly-owned subsidiaries are recorded in their local currency and remeasured into the reporting currency with an effect of changes in the exchange rates between the foreign entities' local currency and the reporting currency in general and administrative expenses. All significant inter-company balances and transactions have been eliminated on consolidation.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company used significant estimates in accounting for the useful lives of property, plant and equipment, reserves for inventory obsolescence, fair value estimates, stock-based compensation and in its going concern analysis.
Credit risk
Credit risk is the risk of loss associated with counterparty's inability to fulfill its contractual obligations. The Company is exposed to credit risk on its cash and cash equivalents, accounts receivable, notes receivable from related party and other receivables (see concentration risk below).
The Company has deposited the cash and cash equivalents with reputable financial institutions, from which management believes the risk of loss is minimal. The Company's cash and cash equivalents are not subject to any external restrictions.
The Company has a guarantee of indebtedness of an investee for which it is at risk for $73,067 plus a proportionate share of interest and collection costs in the case of default.
Concentration risk
In June 2019, Nerium executed a sales and marketing contract with PURE. Sales to PURE for the year ended December 31, 2019 totaled $2,486,029 with an outstanding accounts receivable from PURE at December 31, 2019 of $272,021.
The Company has a supply agreement with Natural Technology, Inc. (NatureTech), which supplies 100% of the Company's NAE8 raw material using the Company's patented extraction process. Purchases from NatureTech for the year ended December 31, 2019 totaled $290,710 (2018 - $384,347) with no outstanding accounts payable to NatureTech.
The Company has a supply contract with Biova, LLC (Biova) with supplies 100% of the Company's Biovaderm raw material. Purchases from Biova for the year ended December 31, 2019 totaled $120,680 (2018 - $nil) with no outstanding accounts payable to Biova.
The Company has operating subsidiaries in Honduras and Mexico. Revenue for the year ended December 31, 2019 totaled $121,814 and $216,696, respectively. Revenues for the year ended December 31, 2018 were $149,262 and $63,434, respectively. Net assets held in Honduras and Mexico at December 31, 2019 were $66,851 and $410,851, respectively. Net assets held in Honduras and Mexico at December 31, 2018 were $102,522 and $77,431.28, respectively.
Nerium Biotechnology, Inc. |
Notes to the Consolidated Financial Statements |
Cash and cash equivalents and restricted cash
Cash and cash equivalents include bank deposits and all highly liquid financial instruments with a maturity of 90 days or less when purchased. As at December 31, 2019 and 2018 cash equivalents consisted of money market instruments. Excluded from cash and cash equivalent are certificates of deposit and money market instruments that are restricted as to use as they are held by the banks in connection with the Company's short-term line of credit and long-term debt.
Allowance for Doubtful Accounts
The Company continuously monitors collections and payments from its customers and maintains allowances for doubtful accounts based upon historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within the Company's expectations, there can be no assurance that the Company will continue to experience the same level of credit losses that it has in the past. A significant change in the liquidity or financial position of any one of the Company's significant customers, or a deterioration in the economic environment in general, could have a material impact on the collectability of the Company's accounts receivable and its future operating results.
Inventories
Inventory is valued at the lower of cost and market value. The cost of finished goods comprises direct materials and, where applicable, direct labor costs and overhead costs. Inventoriable costs for raw materials that are internally produced through an agricultural process are determined in accordance with ASC 905 - Agriculture. Cost is determined using the first-in, first-out method. Market value represents the anticipated selling price less all further costs necessary to complete the sale. Inventory is periodically reviewed for use and obsolescence and adjusted as necessary.
Property, plant and equipment
Property, plant and equipment are recorded at cost less accumulated depreciation. Depreciation is provided over the assets' estimated useful lives using the following methods and annual rates:
Oleander plants | - 20 years | straight-line |
Irrigation equipment | - 20 years | straight-line |
Laboratory and office furniture and equipment | - 5 - 10 years | straight-line |
Farm equipment under capital lease obligations | - 7.5 years | straight-line |
Computer equipment | - 5 years | straight-line |
Farming and manufacturing equipment | - 5 - 10 years | straight-line |
Research equipment | - 5 years | straight-line |
Vehicles | - 5 years | straight-line |
Costs to bring oleander plant seedlings to maturity are capitalized as incurred and are amortized when they reach maturity and have reached commercial production, which is between 1 and 2 years of age.
Intangible assets
Patents
Patents are internally developed and are initially measured at cost. Upon approval by the relevant patent office, the patents are amortized over their expected useful life of 20 years from the date of the patent filing. The value of the patents is reviewed each year for possible impairment and expensed in the year it is determined that a write-down in the value of the patents is required. Patent costs associated with the patents which are not approved or are abandoned are expensed in the period in which such patents are not approved or abandoned.
Trademarks
Trademarks are internally developed and are initially measured at cost. Once registered by the relevant trademark office, the trademarks are amortized over their expected useful life of 10 years. The value of the trademarks will be reviewed each year for possible impairment and expensed in the year if it is determined that a write-down in the value of the trademarks is required. Trademark costs associated with the trademarks which cannot be registered or are abandoned are expensed in the period in which such trademark application is abandoned, or such trademark is abandoned.
Nerium Biotechnology, Inc. |
Notes to the Consolidated Financial Statements |
Other intangible assets
Water rights purchased for farming, having an indefinite useful life, are recorded at cost and are not subject to amortization.
Investments
During the year ended December 31, 2015, the Company determined that it could no longer exercise significant influence over its investment in NI, which interest was redeemed on July 26, 2018. During the year ended December 31, 2017, the Company determined that it could no longer exercise significant influence over its investment in a supplier (see Principles of Consolidation). As a result of the loss of significant influence and the lack of a readily determinable fair value, the investments have been accounted for under the cost method.
Investments are assessed for indicators of impairment at each reporting date. Where there are indicators present or the Company has otherwise estimated the fair value of the investment, if that fair value is less than cost the Company shall determine if the impairment is other than temporary. Any distributions received will be treated as income, except to the extent that they are in excess of the Company's share of earnings, which excess shall be applied as a reduction in the carrying amount of the investment. The Company has determined that as of December 31, 2018, the carrying value of the investments were fully impaired.
Impairment of long-lived assets
Long-lived assets, consisting of property, plant and equipment and patents and trademarks that are held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Intangible assets having an indefinite useful life are assessed for impairment annually or more frequently if impairment indicators exist.
The Company evaluates at each balance sheet date whether circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life of the primary asset in measuring whether the carrying amounts are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. As of December 31, 2019 and 2018, the Company performed an analysis utilizing undiscounted cash flows of the related assets. The Company performs its annual indefinite lived intangible impairment test, as described above, as of December 31, 2019 and 2018 and noted there were no further triggering events or indicators of impairment as of December 31, 2019. Based on the results, the Company did not record any impairment charges to the value of its long-lived assets at December 31, 2019 and 2018.
Income taxes
The Company accounts for income taxes in accordance with FASB ASC 740 - Income Taxes, on a tax jurisdictional basis. The Company files income tax returns in Canada, the Province of Ontario, United States federal and state jurisdictions, as well as in Latin America. The years ended December 31, 2018, 2017, and 2016 are open for review and assessment by the Canada Revenue Agency and the Internal Revenue Service.
Income tax expense consists of current and deferred tax expense. Current and deferred tax are recognized in profit or loss except to the extent that it relates to items recognized directly in equity or other comprehensive income.
Current tax is recognized and measured at the amount expected to be recovered from or payable to the taxation authorities based on the income tax rates enacted or substantively enacted at the end of the reporting period and includes any adjustment to taxes payable in respect of previous years.
Deferred tax is recognized on any temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable earnings. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realized and the liability is settled. The effect of a change in the enacted or substantively enacted tax rates is recognized in net earnings and comprehensive income or in equity depending on the item to which the adjustment relates.
Deferred tax assets are recognized to the extent future recovery is probable. At each reporting period end, deferred tax assets are reserved to the extent that it is no longer probable that sufficient taxable earnings will be available to allow all or part of the asset to be recovered.
Nerium Biotechnology, Inc. |
Notes to the Consolidated Financial Statements |
Provisions for taxes are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Company reviews the adequacy of these provisions at the end of the reporting period. However, it is possible that at some future date an additional liability could result from audits by taxing authorities. Where the final outcome of these tax-related matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made.
The Company assesses the likelihood of the financial statement effect of a tax position that should be recognized when it is more likely than not that the position will be sustained upon examination by a taxing authority based on the technical merits of the tax position, circumstances, and information available as of the reporting date. The Company is subject to examination by taxing authorities in jurisdictions such as the United States and Canada. Management does not believe that there are any uncertain tax positions that would result in an asset or liability for taxes being recognized in the accompanying consolidated financial statements.
ASC 740 prescribes recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in periods, disclosure and transition. At December 31, 2019 and 2018, the Company has not taken any tax positions that would require disclosure under ASC 740.
Revenue recognition
The Company recognizes revenue in accordance with ASC Topic 606 Revenue from Contracts with Customers (ASC 606), which provides a five-step model for recognizing revenue from contracts with customers as follows:
• Identify the contract with a customer
• Identify the performance obligations in the contract
• Determine the transaction price
• Allocate the transaction price to the performance obligations in the contract
• Recognize revenue when or as performance obligations are satisfied
The Company is a wholesale manufacturer of skincare/cosmetic products with revenue derived from sales to customers. Products include the original NeriumAD® cosmetic products, Nerium Advanced line products, and the Nerium RX Therapy line, which are over the counter (OTC) products. The Company's products are marketed and sold primarily to end-user consumers in the United States and certain international markets. The Company's results of operations are substantially affected by economic conditions, which can vary significantly by market and can be impacted by consumer disposable income levels and spending habits.
Merchandise sales: The Company records revenue from sales of merchandise upon shipment of the good to the customer, which is when our performance obligation is satisfied. For retail sales delivery occurs at the point of sale. Online sales, which may include fees for shipping and handling, are recorded upon shipment to the customer.
The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods and services to the customer. Revenue on sales of merchandise is recorded based on the transaction price, which includes fixed consideration less an estimate of variable consideration for return rights.
The Company records deposits for the purchase of its products as a contract liability for which it defers the recognition of revenue until the product ordered is shipped to the customer at which point control has transferred.
Shipping and handling costs
The Company's shipping and handling costs of $306,535 and $125,932 are included in cost of sales for the years ended December 31, 2019 and 2018 respectively.
Advertising
All advertising costs of the Company are expensed as incurred. Advertising costs were $149,669 and $30,530 for the years ended December 31, 2019 and 2018.
Foreign currency translation
The Company accounts for foreign currency pursuant to ASC 830 - Foreign Currency Matters. The Company's functional and presentation currency is the U.S. dollar.
Nerium Biotechnology, Inc. |
Notes to the Consolidated Financial Statements |
During 2019 it was determined that the Company's international operations are dependent on the economic environment of the Company's functional currency and are distributors or sales agents of the parent Company products. The Company's foreign subsidiaries' assets and liabilities are re-measured into U.S. dollars using exchange rates prevailing at the end of the reporting period. Revenues and expenses are re-measured into U.S. dollars at the average exchange rate for the period; otherwise, if it is appropriate the rate at the transaction date is used. Exchange differences are recorded within Selling, General and Administrative expense on the Consolidated Statement of Operations and Comprehensive Loss for the year ending December 31, 2019. For the year ended December 31, The Company realized an exchange gain on translating foreign operations of $10,950.
During 2018 the Company's international operations were conducted by its foreign subsidiaries in their respective local currencies, which is the respective subsidiaries' functional currency, with the exception of SIES which has the U.S. dollar as its functional currency. Except for SIES, the Company translates its foreign subsidiaries' assets and liabilities into U.S. dollars using exchange rates prevailing at the end of the reporting period. Revenues and expenses are translated into U.S. dollars at the average exchange rate for the period; otherwise, if it is appropriate the rate at the transaction date is used. An exchange gain of $25,069 was recognized in other comprehensive income for the year ended December 31, 2018
Research and development costs
The Company's policy is to expense research and development costs as they are incurred. The Company supports research of the growing of oleander plants, as well as the powder produced from those plants, which is used in manufacturing products. The Company also supports research and development of products for Nerium SkinCare and the Salud Integral Group. During the year ended December 31, 2019, $100,120 (2018 - $226,198) of research and development costs have been expensed.
Net Loss per Share
Comprehensive net loss attributable to common stockholders per share is calculated by dividing the Comprehensive net loss attributable to common stockholders by the weighted-average number of shares of common stock without consideration of common stock equivalents. Since the Company was in a loss position for all periods presented, diluted net loss per share is the same as basic net loss per share for all periods presented as the inclusion of all potential dilutive securities would have been antidilutive.
Stock-based compensation
The Company recognizes the cost of stock-based awards granted to employees based on the estimated grant-date fair value of the awards. The value of the portion of the award is recognized as expense ratably as the award vests over the requisite service period. The Company recognizes the compensation costs for awards that vest over several years on a straight-line basis over the vesting period Forfeitures are recognized when they occur, which may result in the reversal of compensation costs in subsequent periods as the forfeitures arise.
Financial instruments
Financial instruments carried at fair value include cash and cash equivalents and any short term investments.
FASB ASC 820, Fair Value Measurements and Disclosures requires the disclosure of a three-level hierarchy that reflects the significance of the inputs used in making fair value measurements for financial instruments. The three levels of fair value hierarchy are:
• Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;
• Level 2 - Inputs other than quoted prices that are observable for assets or liabilities, either directly or indirectly; and
• Level 3 - Inputs for assets or liabilities that are not based on observable market data.
Financial instruments not carried at fair value include accounts receivable, notes receivable, accounts payable, accrued expenses and long-term debt. The carrying amounts of these financial instruments, except notes receivable, approximate fair value due to the highly liquid nature of these short-term instruments. It is not practicable to estimate the fair value of the notes receivable in arbitration.
Nerium Biotechnology, Inc. |
Notes to the Consolidated Financial Statements |
Leases
In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02") as codified in Accounting Standards Codification ("ASC") No. 842 ("ASC 842"). ASU 2016-02, ASC 842, and additional issued guidance are intended to improve financial reporting of leasing transactions by requiring organizations that lease assets to recognize assets and liabilities for the rights and obligations created by leases that extend more than twelve months. This accounting update also requires additional disclosures surrounding the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for financial statements issued for annual and interim periods beginning after December 15, 2018 for public business entities. The Company adopted ASU 2016-02 as of January 1, 2019 using the effective date transition method of implementation offered under ASU 2018-11, "Leases (Topic 842) - Targeted Improvements" issued in July 2018 ("ASU 2018-11"), under which entities may change their date of initial application of ASU 2016-02 to the beginning of the period of adoption, or January 1, 2019. Accordingly, the Company is required to apply the prior lease guidance pursuant to ASC Topic 840 "Leases" in the comparative periods, provide the disclosures required by ASC Topic 840 for all periods that continue to be presented in accordance with ASC Topic 840, recognize the effects of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of January 1, 2019, if any, and provide certain disclosures under ASC 842. The Company has also elected the package of practical expedients, applied by class of underlying asset, permitted in ASU 2018-11. Accordingly, the Company accounted for its existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contracts contain a lease under ASC 842, (b) whether classification of the operating leases would be different in accordance with ASC 842, and (c) whether the unamortized initial direct costs before transition adjustments (as of the period of adoption) would have met the definition of initial direct costs in ASC 842 at lease commencement, and the Company did not separate lease and non-lease components.
As a result of the adoption of the new lease accounting guidance using the effective date transition method, on January 1, 2019, the Company recognized (a) a lease liability of approximately $161,000, which represents the present value of the remaining lease payments, as of the date of adoption, discounted using the Company's incremental borrowing rate of 7.5%, and (b) a right-of-use asset of approximately $161,000. The adoption of the new standard did not result in any adjustment to the Company's retained earnings as of January 1, 2019. The adoption of this standard did not have a material impact on the Company's consolidated balance sheets, cash used/provided from operating, investing, or financing activities in the consolidated statements of cash flows, or on the Company's operating results. The most significant impact was the recognition of right-of-use assets for operating leases, which are reflected in "Right-of-use asset, operating leases" and lease liabilities for operating and finance leases, which are reflected in "Accrued expenses and other current liabilities," for the current portion of the lease liabilities, and in "Other long-term liabilities" for the non-current portion of the lease liabilities, respectively.
Segment Information
The Company is organized as a single operating segment, whereby its chief operating decision maker assess the performance of and allocates resources to the business as a whole.
Adoption of new accounting principles
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and a lease liability for virtually all leases. This ASU, as amended, is effective for the Company beginning in the first quarter of fiscal 2019. Adoption of this guidance resulted initially in the addition of approximately $161,000 of assets and liabilities to the consolidated balance sheet, with no significant change to the consolidated statements of operations or cash flows. The Company elected the package of practical expedients upon adoption, which permits it not to reassess whether existing contracts are or contain leases, the lease classification of existing leases, or initial direct costs for existing leases. The Company also elected not to separate lease and non-lease components for all leases and not to recognize a right-of-use asset and a lease liability for short-term leases.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash ("ASU 2016-18"). ASU 2016-18 clarifies certain existing principles in ASU 230, including providing additional guidance related to transfers between cash and restricted cash and how entities present, in their statement of cash flows, the cash receipts and payments that directly affect the restricted cash accounts. This ASU will be effective for annual periods beginning after December 1, 2018, including interim periods within those fiscal years with early adoption permitted. The guidance requires application using a retrospective transition method. Adoption of this guidance on January 1, 2019 did not have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides financial statement preparers with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. This ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years with early adoption permitted. Adoption of this guidance on January 1, 2019 did not have a material impact on its consolidated financial statements.
Nerium Biotechnology, Inc. |
Notes to the Consolidated Financial Statements |
In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which provides for nonemployee share-based payment transactions to be measured at fair value on the date of grant. Probability is to be considered on such nonemployee awards with performance conditions. This ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years with early adoption permitted. The guidance requires application using a retrospective transition method. Adoption of this guidance on January 1, 2019 did not have a material impact on its consolidated financial statements.
Recently issued accounting pronouncements
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. This ASU removed some disclosures; modified others and added some new disclosure requirements. The removal and amendment of certain disclosures can be adopted immediately with retrospective application. As such, companies may stop including these disclosures for both the current and comparative periods in their next set of financial statements. The effective date for the additional disclosures is for annual periods beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the new guidance and does not expect it to have a material impact on its consolidated financial statements.
3. Going Concern
These consolidated financial statements have been prepared with the assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future.
There are uncertainties related to conditions and events that cast doubt about the Company's ability to continue as a going concern and, ultimately, on the appropriateness of the use of the accounting principles applicable to a going concern. During the year ended December 31, 2019 the Company reported a net comprehensive loss attributable to controlling interest of $4,967,307 (2018 - $9,160,737) and negative cash flow from operations of $5,865,387 (2018 - $5,385,585). The Company's working capital at December 31, 2019 is $5,098,821 (2018 - $9,185,398).
The Company's success depends on the profitable commercialization of its line of skin care products. There is no assurance that the Company will be successful in this regard in the future. Based upon its current operating and financial plans, management of the Company believes that it will have sufficient access to financial resources to fund the Company's operations for the twelve months subsequent to the issuance date of its consolidated financial statements for the year ended December 31, 2019 which include but not limited to a successful product launch, raising additional shareholder investment, and tax refunds. However, the ability of the Company to continue as a going concern is dependent upon its ability to secure additional financing and/or profitably commercialize its products.
These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of its assets or the amounts classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
On January 30, 2020, the World Health Organization ("WHO") announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the "COVID-19 outbreak") and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date of this Annual Report. Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020. However, if the pandemic continues, it will have an adverse effect on the Company's results of future operations, financial position, and liquidity in 2020. Additionally, the COVID-19 outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown, which would impair the Company's ability to raise needed funds to continue as a going concern.
If the going concern assumptions were not appropriate for these consolidated financial statements then adjustments would be necessary to the carrying value of assets and liabilities, the reported expenses and the statement of financial position classifications used; in such cases, these adjustments could be material.
Nerium Biotechnology, Inc. |
Notes to the Consolidated Financial Statements |
4. Inventories
| 2019 | 2018 | ||||||
| Raw materials and consumables | $ | 2,575,059 | $ | 1,448,079 | |||
| WIP | 118,238 | - | |||||
| Supplies | 15,122 | 114,791 | |||||
| Finished goods | 838,886 | 119,624 | |||||
| 3,547,305 | 1,682,494 | ||||||
| Less: provision for inventory obsolescence | (824,267 | ) | (1,131,008 | ) | |||
| Total | $ | 2,723,038 | $ | 551,486 |
The Company recorded a $497,000 provision for obsolescence in the year ended December 31, 2019 (2018 - $495,000), on quantities of raw materials and consumables that may expire prior to use based on current volumes of manufacturing activity and recorded a write-off of expired raw materials of approximately $804,000 (2018 - $nil) for a net reduction in the provision for obsolescence for the year ended December 31, 2019 of approximately $307,000 (2018 - net increase of $495,000).
5. Note and Interest Receivable - Related Party
(a) On July 26, 2018, the Company entered into a Settlement Agreement with NI. The terms of the settlement provide for the payment of $10 million by NI to NSC, of which $6 million was paid on July 26, 2018. The $4 million balance is be paid quarterly over a three-year period beginning on October 25, 2018. The $4 million was discounted at a rate of 5.75%. As of September 30, 2019, the first three installment payments (October 2018, January 2019 and April 2019) were received from NI on the respective due dates. NI has made the payments due July 2019, October 2019, January 2020 and April 2020 into an escrow account.
| 2019 | 2018 | |||||
| Opening carrying value | $ | 3,403,602 | $ | 3,650,025 | ||
| Accretion of interest | 157,018 | 86,910 | ||||
| Cash receipts | (666,666 | ) | (333,333 | ) | ||
| Closing carrying value | 2,893,954 | 3,403,602 | ||||
| Less: current portion | (1,255,363 | ) | (1,198,855 | ) | ||
| Long-term portion | $ | 1,638,591 | $ | 2,204,747 |
(b) Between January and April 2016, NSC loaned a total of $800,000 to a supplier pursuant to a promissory note. The note bears interest at the short-term federal rate per annum, with interest paid quarterly, and originally bore a maturity date of December 31, 2016. On December 31, 2016 and 2017, it was amended to reflect a new maturity date of January 1, 2018 and July 2, 2018, respectively. On July 2, 2018, it was amended a third time to reflect a new maturity date of January 1, 2020. NSC holds a secured interest in the supplier's accounts receivable and inventory. Additionally, the note is secured by personal guarantees provided by each of the major shareholders of Biova. The balance of the note receivable and related interest at December 31, 2019 was $803,312 (December 31, 2018 - $805,311).
6. Property, Plant and Equipment
| Cost | Accumulated depreciation | 2019 Net book value | |||||||
| Land | $ | 1,408,912 | - | $ | 1,408,912 | ||||
| Leasehold improvements | 29,389 | 29,389 | - | ||||||
| Oleander plants | 2,524,258 | 771,332 | 1,752,926 | ||||||
| Irrigation equipment | 932,588 | 303,091 | 629,497 | ||||||
| Laboratory, office furniture and equipment | 425,203 | 404,678 | 20,525 | ||||||
| Computer equipment | 16,544 | 16,544 | - | ||||||
| Farming and manufacturing equipment | 1,074,318 | 567,734 | 506,584 | ||||||
| Right of use asset - finance lease obligations | 28,696 | 7,089 | 21,607 | ||||||
| $ | 6,439,908 | $ | 2,099,857 | $ | 4,340,051 |
Nerium Biotechnology, Inc. |
Notes to the Consolidated Financial Statements |
| Cost | Accumulated depreciation | 2018 Net book value | |||||||
| Land | $ | 1,408,912 | $ | - | $ | 1,408,912 | |||
| Leasehold improvements | 29,389 | 27,536 | 1,853 | ||||||
| Oleander plants | 2,524,258 | 645,119 | 1,879,139 | ||||||
| Irrigation equipment | 932,588 | 256,463 | 676,125 | ||||||
| Laboratory, office furniture and equipment | 454,251 | 392,923 | 61,328 | ||||||
| Computer equipment | 16,544 | 13,512 | 3,032 | ||||||
| Vehicles | 30,268 | 28,562 | 1,706 | ||||||
| Farming and manufacturing equipment | 1,001,318 | 474,492 | 526,646 | ||||||
| $ | 6,397,348 | $ | 1,838,607 | $ | 4,558,741 |
Depreciation for the years ended December 31 is included in the following cost categories:
| 2019 | 2018 | |||||
| Cost of sales | $ | 126,213 | $ | 143,647 | ||
| Depreciation | 166,468 | 176,177 | ||||
| $ | 292,681 | $ | 319,824 |
7. Intangible Assets
The Company's intangible assets are reflected in the table below:
| Finite-lived | Indefinite-lived | ||||||||||||||
| 2018 | Patents | Trademarks | Total | Water rights | Total | ||||||||||
| Balance as of December 31, 2017 | $ | 504,669 | $ | 2,354,212 | $ | 2,858,881 | $ | 863,178 | $ | 863,178 | |||||
| Additions | 62,684 | 69,080 | 131,764 | - | - | ||||||||||
| Impairment | (26,927 | ) | - | (26,927 | ) | - | - | ||||||||
| Balance at December 31, 2018 | 540,424 | 2,423,292 | 2,963,716 | 863,178 | 863,178 | ||||||||||
| Less: accumulated amortization: | |||||||||||||||
| Accumulated amortization as of December 31, 2017 | (70,979 | ) | (524,308 | ) | (595,287 | ) | - | - | |||||||
| Amortization expense | (17,883 | ) | (260,495 | ) | (278,378 | ) | - | - | |||||||
| Accumulated amortization as of December 31, 2018 | (88,862 | ) | (784,803 | ) | (873,665 | ) | - | - | |||||||
| Net balance as of December 31, 2018 | $ | 451,562 | $ | 1,638,489 | $ | 2,090,051 | $ | 863,178 | $ | 863,178 | |||||
| Weighted average life (in years) | 10 | 10 | |||||||||||||
Nerium Biotechnology, Inc. |
Notes to the Consolidated Financial Statements |
| Finite-lived | Indefinite-lived | ||||||||||||||
| 2019 | Patents | Trademarks | Total | Water rights | Total | ||||||||||
| Balance as of December 31, 2018 | $ | 540,424 | $ | 2,423,292 | $ | 2,963,716 | $ | 863,178 | $ | 863,178 | |||||
| Additions | 52,183 | 138,046 | 190,229 | - | - | ||||||||||
| Balance at December 31, 2018 | 592,607 | 2,561,339 | 3,153,945 | 863,178 | 863,173 | ||||||||||
| Less: accumulated amortization: | |||||||||||||||
| Accumulated amortization as of December 31, 2018 | (88,862 | ) | (784,803 | ) | (873,665 | ) | - | - | |||||||
| Amortization expense | (23,482 | ) | (249,780 | ) | (273,262 | ) | - | - | |||||||
| Accumulated amortization as of December 31, 2019 | (112,344 | ) | (1,034,584 | ) | (1,146,927 | ) | - | - | |||||||
| Net balance as of December 31, 2019 | $ | 480,263 | $ | 1,526,755 | $ | 2,007,018 | $ | 863,178 | $ | 863,178 | |||||
| Weighted average life (in years) | 10 | 10 | |||||||||||||
Finite-lived intangible assets
The Company was awarded a process patent for the extraction of oleandrin using Aloe Vera in 2014, the patent extends until 2029. It has an additional patent pending which is expected to be given final approval in 2020. The Company has also registered various trademarks in North America and in other international jurisdictions.
Amortization expense for patents and trademarks for the year ended December 31, 2019 totaled $273,262 (2018 - $278,378). During 2018, the Company abandoned certain patent applications totaling $26,928, which amount has been recorded as impairment loss.
The estimated amortization expense for the next five years and thereafter is as follows:
| 2020 | $ | 275,000 | |
| 2021 | 275,000 | ||
| 2022 | 275,000 | ||
| 2023 | 275,000 | ||
| 2024 | 275,000 | ||
| Thereafter | 632,018 | ||
| $ | 2,007,018 |
Indefinite-lived intangible assets
In January 2015, the Company acquired 39.333 acre-feet of transferable Edwards Aquifer Water for total cash consideration of $196,665. Additionally, the Company acquired 120 acre-feet of non-transferable (restricted) water rights which was allocated a value of $66,000 pursuant to the purchase of 253.6 acres of farmland, but which were sold in October 2017. These water rights supplement the Company's right to use 120 acre-feet of unrestricted groundwater from the Edwards Aquifer Water that was purchased in 2013 for $666,513.
8. Investments
(a) The Company had a 30% residual interest in NI which it recorded using the cost method as of December 31, 2015. Prior to the fourth quarter of 2015, the Company had significant influence over NI and accounted for its investment using the equity method of accounting. The carrying value of the cost method of investment at December 31, 2017 and prior to the transaction described below, was the original cost plus the allocation of equity income prior to the change in accounting method.
Effective July 26, 2018, the Company entered into a Settlement Agreement that provides for redemption of its residual interest and the settlement of all disputes pending between the parties, including the pricing adjustment provision and related accounts receivable. The terms of the settlement provide for the payment of $10 million by NI to NSC, of which $6 million was paid on July 26, 2018. The $4 million balance is to be paid quarterly over a three-year period beginning on October 25, 2018. The $4 million was discounted at a rate of 5.75%. The net effect of the settlement resulted in an impairment on the carrying value of the investment totaling $1,472,689.
The following table displays the change in the carrying value between December 31, 2017 and December 30, 2018:
| Carrying value of equity investment at December 31, 2017 | $ | 12,243,593 | |
| Redemption of residual interest - cash received | (6,000,000 | ) | |
| Redemption of residual interest - receivable | (3,650,027 | ) | |
| Settlement of pricing adjustment provision | (7,759,536 | ) | |
| Settlement of accounts receivable | 6,638,659 | ||
| Impairment loss | (1,472,689 | ) | |
| Carrying value of investment at December 31, 2018 | $ | - |
Nerium Biotechnology, Inc. |
Notes to the Consolidated Financial Statements |
(b) On October 7, 2014 and February 17, 2015, NSC purchased an 8.4% and 9.775% equity interest in a company that supplies materials used by NSC in its products for $495,000 and $705,000, respectively. As part of the agreement, NSC also had options to acquire an additional equity interest for $800,000 which, if exercised, would result in the Company having a 27% interest in the investee. NSC's right to exercise the remaining option was extended until January 31, 2019 from the first, second, and third amendment dates of December 31, 2015, 2016, and 2017, respectively, and the original date of September 30, 2015. The Company did not exercise its option before the expiry date. The investee has the right to repurchase all equity interests held by NSC for the amount of initial investment paid by NSC.
On December 18, 2015, NSC guaranteed its proportionate share of the investee's existing line of credit. The line of credit was renewed on that date, at which time the bank reviewed the current ownership of the investee and requested revised proportionate guarantees. The line of credit is secured by the investee's accounts receivable and inventory, bears interest at the lender's prime rate plus 1% subject to a minimum of 5.5% per annum, payable monthly and matured on December 1, 2017. The line of credit has been renewed until December 31, 2020.
In 2014, NSC provided a partial guarantee to support the supplier's equipment capital lease financing provided by a bank. The guarantee provided was to the extent of 27% of the supplier's lease obligations. At December 31, 2019 this supplier's indebtedness to the bank was $1,814,455 (2018 - $2,397,132).The primary security provided by the supplier to the bank is the underlying plant equipment that the supplier acquired at a cost of $5 million between 2014-2016.
The guarantee of indebtedness was initially recorded at its estimated fair and the amount that NSC is at risk with respect to the combined guarantees is $73,067 (2018 - $90,800) and has been recorded as a current liability on the consolidated balance sheets.
The investee also may request additional capital contributions of cash as equity investments to support its operations, NSC has the right to make no further capital contributions, which would result in a proportionate dilution of its ownership, or NSC may make additional capital contributions as requested by the investee. NSC has not made capital contributions since December 2015. During the years ending December 31, 2018 and 2017, respectively, no capital contributions were made as equity investments in the investee by any parties, and NSC's proportionate ownership remained at 15.53% (December 31, 2017 - 15.53%). During the year ended December 31, 2018, the Company recorded an impairment loss totaling $644,719, representing the full carrying value of its residual interest in its supplier due to an absence of an ability to recover the carrying amount of the investment and the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment.
The change in the investment balance during the years is as follows:
| Carrying value of equity investment at December 31, 2017 | $ | 644,719 | |
| Impairment loss on equity investment for the year ended December 31, 2018 | (644,719 | ) | |
| Carrying value of equity investment at December 31, 2018 | $ | - |
9. Accrued expenses
Expenses that have been incurred but have not been invoiced by the supplier or service provider are accrued. Accrued expense at December 31, 2019 and 2018 consist of the following:
| 2019 | 2018 | |||||
| Professional services | $ | 128,678 | $ | 132,488 | ||
| Operating lease obligation | 55,501 | - | ||||
| Payroll expenses | 47,046 | 53,757 | ||||
| Directors' fees | 38,190 | - | ||||
| Inventory | 19,966 | - | ||||
| Income taxes | 5,808 | - | ||||
| Finance/capital lease obligations | 5,278 | 5,134 | ||||
| Property, plant and equipment | - | 1,000 | ||||
| Other | 6,049 | 4,927 | ||||
| Total | $ | 306,516 | $ | 197,306 |
Nerium Biotechnology, Inc. |
Notes to the Consolidated Financial Statements |
10. Debt
Debt consist of the following:
| December 31, 2019 | December 31, 2018 | |||||
| Bank term note payable requiring quarterly principal and interest payments of $4,628 with an effective interest rate of 4.3% maturing on March 31, 2024 | $ | 71,466 | $ | - | ||
| Less current maturities | 16,341 | - | ||||
| Long-term portion | $ | 55,125 | $ | - |
The note is secured by the equipment acquired as well as a certificate deposit held as restricted cash. The principal payments for the next five years as follows:
| 2020 | 16,341 | ||
| 2021 | 16,577 | ||
| 2022 | 16,816 | ||
| 2023 | 17,058 | ||
| 2024 | 4,674 | ||
| $ | 71,466 |
11. Leases
Operating leases
The Company is obligated under operating leases for office space. On June 12, 2015, the Company entered into a lease agreement for office space for its corporate headquarters in San Antonio, Texas. The term of the lease commenced on July 1, 2015 and will continue until July 31, 2020, with annual rental payments of approximately $90,000, paid over monthly installments, subject to increases of approximately 2% annually on the anniversary of the commencement date of the lease term.
The Company leases office space in Dallas, Texas under a lease with an effective date of February 1, 2018 and that expires on July 31, 2020. Annual rent is approximately $14,000, paid over monthly installments subject to increases of approximately 2% annually on the anniversary of the commencement date of the lease term.
The following is a maturity analysis of the annual undiscounted cash flows reconciled to the carrying value of the operating lease liabilities as of December 31, 2019:
| Year ending December 31, | |||
| 2020 | $ | 55,666 | |
| Less imputed interest | (1,165 | ) | |
| Total | $ | 55,501 |
| Operating cash flows from operating leases | $ | 110,293 | |
| Weighted-average remaining lease term (in months) - operating leases | 7.0 | ||
| Weighted-average discount rate - operating leases | 7.5% |
As of December 31, 2019, the carrying value of the right-of-use assets for the operating leases was approximately $56,000, which is reflected in "Right-of-use asset, operating leases," and the carrying value of the lease liabilities for operating leases was approximately $56,000, all of which related to the current portion of the lease liabilities and is recorded in "Accrued expenses and other current liabilities." Amortization of the right-of-use asset for the year ended December 31, 2019 was $105,499.
Nerium Biotechnology, Inc. |
Notes to the Consolidated Financial Statements |
Finance leases
The Company leases office equipment under capital leases. At December 31, 2019, the minimum lease obligation payments on finance leases are as follows:
| 2020 | 5,278 | ||
| 2021 | 7,417 | ||
| 2022 | 5,414 | ||
| 2023 | 4,746 | ||
| 2024 | 1,187 | ||
| $ | 24,043 |
In 2019, the Company paid interest on these finance leases totaling $2,961 (2018 - $2,666).
12. Stock-Based Compensation
The Company has reserved and set aside up to 6,256,000 common shares for the granting of options to directors, employees and consultants. Since June 22, 2012, the Company has had two stock option plans in effect. In one plan, the Company has reserved 3,128,000 common shares for the granting of options to employees, and in the second plan, the Company has reserved 3,128,000 common shares for granting options to directors and consultants. The terms of the awards under both plans are determined by the Board of Directors.
The Company values stock options using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the risk-free interest rate, expected life, expected stock price volatility and dividend yield. The risk-free interest rate assumption is based upon observed interest rates for constant maturity U.S. Treasury securities consistent with the expected term of the Company's employee stock options. The expected life represents the period of time the stock options are expected to be outstanding and is based on the simplified method. The Company uses the simplified method due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected life of the stock options. Expected volatility is based on historical volatilities for publicly traded stock of comparable companies over the estimated expected life of the stock options. The Company assumes no dividend yield because dividends are not expected to be paid in the near future, which is consistent with the Company's history of not paying dividends. The valuation of stock options is also impacted by the valuation of common stock. Stock option awards generally have ten-year contractual terms and generally vest immediately or vest over four years for issuances to employees and directors based on continuous service.
A summary of the status of the Company's outstanding stock options as of December 31, 2019 and 2018, and changes during the years are presented in the following table.
| December 31, 2019 | December 31, 2018 | ||||||||||||
| Stock Options | Weighted- Average Exercise Price | Stock Options | Weighted- Average Exercise Price | ||||||||||
| Outstanding, beginning of year | 2,015,000 | $ | 1.49 | 2,357,500 | $ | 1.44 | |||||||
| Exercised | - | - | - | - | |||||||||
| Granted | - | - | 50,000 | 2.00 | |||||||||
| Expired/Cancelled | - | - | (392,500 | ) | 1.21 | ||||||||
| Outstanding, end of year | 2,015,000 | $ | 1.49 | 2,015,000 | $ | 1.49 | |||||||
Nerium Biotechnology, Inc. |
Notes to the Consolidated Financial Statements |
The weighted-average exercise price of options outstanding and of options exercisable as at December 31, 2019 are as follows:
Options Outstanding |
| Options Exercisable | |||||
Exercise Price | Outstanding # | Weighted- | Weighted- | Weighted- |
| Exercisable # | Weighted- |
|
|
|
|
|
|
|
|
$1.00 | 1,025,000 | $1.22 | $1.00 | 2.96 |
| 1,025,000 | $1.00 |
$2.00 | 990,000 | $1.49 | $2.00 | 3.85 |
| 990,000 | $2.00 |
| 2,015,000 | $1.35 | $1.49 | 3.39 |
| 2,015,000 | $1.49 |
The following table summarizes stock-based compensation during the years ended December 31, 2019 and 2018:
| Stock-based compensation | ||||||||
| Issuance | Number of Options | Vesting terms | 2019 | 2018 | ||||
| January 2, 2018 (i) | 50,000 | Immediately | $ | - | $ | 37,000 | ||
| $ | - | $ | 37,000 | |||||
(i) 50,000 stock options were granted to a director in January 2018 with an exercise price of $2.00, which vested immediately and expire on January 4, 2029. The fair value was determined to be $37,000 at $0.74 per option, using the Black-Scholes model for pricing options and was recorded as an increase to stock-based compensation expense and an increase to additional paid in capital for the period ended December 31, 2018. The following assumptions were used: risk free interest rate of 2.35%; expected volatility of 118%; dividend yield of 0.0%; forfeiture rate of 0% and expected life of 6.00 years.
13. Loss Per Share
The dilutive effect of stock options is excluded for the years ended December 31, 2019 and 2018 as the Company has a reported net loss for those years.
The reconciliation of the number of shares to calculate the diluted loss per share is calculated as follows:
| Years ended December 31, | ||||||
| 2019 | 2018 | |||||
| NUMERATOR | ||||||
| Net loss attributable to Nerium Biotechnology, Inc. | $ | (4,967,307 | ) | $ | (9,160,737 | ) |
| DENOMINATOR | ||||||
| Weighted-average common shares outstanding | 36,469,481 | 36,469,481 | ||||
| Dilutive effect of: | ||||||
| Stock options | - | - | ||||
| Basic and diluted weighted-average common shares outstanding | 36,469,481 | 36,469,481 | ||||
| Basic and diluted loss per common share | $ | (0.14 | ) | $ (0.25) | ||
Nerium Biotechnology, Inc. |
Notes to the Consolidated Financial Statements |
14. Related Party Transactions and Balances
(a) During the year ended December 31, 2019, total gross sales by the Company to NI were $149,784 (2018 - $2,666,993).
At December 31, 2019, deposits recorded as a contract liability for ordered product from NI were $147,151 (2018 - $263,517).
Pursuant to the Settlement Agreement which was effective July 26, 2018, the pricing adjustment provision and related accounts receivable of $6,638,659 were settled. At December 31, 2018, the elimination of the pricing adjustment and accounts receivable, together with the redemption of NSC's equity interest in NI, resulted in a reduction of the carrying value of the Company's residual interest in NI in the amount of $1,472,689. During the years ended December 31, 2019 and December 31, 2018, the Company received $666,667 and $333,333 in settlement payments from NI, respectively. NI has made the quarterly payments of $333,333 due in July 2019, October 2019, January 2020 and April 2020 into an escrow account.
(b) The Company has entered into two separate agreements with an individual that is a member of the Board of Directors. The first agreement, a production and purchasing agreement effective June 2004, entitles the individual to receive $3.25 per vial of Anvirzel® sold to third parties in exchange for the use of facilities and production supervision. The second agreement, a consulting agreement effective January 2007, entitles the individual to receive an additional $3.25 per vial of Anvirzel sold to third parties in exchange for consulting services in relation to the production of Anvirzel®. Both agreements remain in effect for as long as Anvirzel® is produced in Honduras. The commission incurred during the year ended December 31, 2019 was $440 (2018 - $787) and is included in cost of sales.
During the year ended December 31, 2019, the Company's sales to a company in Honduras that is controlled by this member of the Board of Directors were $nil (2018 - $2,230). As at December 31, 2019, accounts receivable from this individual totaled $nil (2018 - $2,644).
(c) During the year ended December 31, 2019, the Company purchased 600 kg of raw material inventory for $120,000 from a supplier in which the Company has a 15.84% equity interest (2018 - nil kg for $nil). As at December 31, 2019, the Company had $nil in outstanding accounts payable to this supplier.
15. Income Taxes
The following table summarizes the components of deferred tax:
| 2019 | 2018 | |||||
| Deferred tax assets | ||||||
| Intangible assets | $ | 83,535 | $ | 73,324 | ||
| Inventory (UNICAP) | 286,814 | 387,672 | ||||
| Charitable donations carryforward | 53,597 | 54,608 | ||||
| Net operating loss carryforwards - U.S. | 7,453,034 | 2,571,758 | ||||
| Non-capital losses carried forward - Canada | 502,005 | - | ||||
| Non-capital losses carry forward - foreign entities | 904,229 | 706,896 | ||||
| Capital loss carryforwards - Canada | 210,110 | 210,110 | ||||
| Foreign tax credits | 49,303 | - | ||||
| Other | 14,849 | 4,042 | ||||
| Total gross deferred tax assets | 9,557,476 | 4,008,410 | ||||
| Valuation allowance | (8,420,902 | ) | (3,676,528 | ) | ||
| Total deferred tax assets | 1,136,574 | 331,882 | ||||
| Deferred tax liabilities | ||||||
| Property, plant and equipment - Canada | $ | (315,226 | ) | $ | (278,508 | ) |
| Property, plant and equipment - U.S. | (285,906 | ) | (19,195 | ) | ||
| Intangible assets - U.S. | (421,474 | ) | - | |||
| Investment in Biova | (113,968 | ) | (34,179 | ) | ||
| Total deferred tax liability | (1,136,574 | ) | (331,882 | ) | ||
| Deferred tax assets, net | $ | - | $ | - |
Nerium Biotechnology, Inc. |
Notes to the Consolidated Financial Statements |
The reconciliation of the combined Canadian federal and provincial statutory income tax rate of 25.0% (2018 - 25.0%) to the effective tax rate is as follows:
| 2019 | 2018 | |||||
| Loss before the provision for income taxes | $ | (4,881,579 | ) | $ | (9,997,615 | ) |
| Expected recovery for income taxes | $ | (1,220,395 | ) | $ | (2,499,404 | ) |
| Differences in foreign tax rates | 75,409 | 189,415 | ||||
| Tax rate changes and other adjustments | 163,346 | 7,124 | ||||
| Share-based compensation and non-deductible expenses | - | (96,782 | ) | |||
| Unrealized income from subsidiary | (3,676,657 | ) | - | |||
| Change in deferred tax asset valuation allowance | 4,744,374 | 1,588,454 | ||||
| Income tax expense | $ | 86,077 | $ | (811,193 | ) |
The Company's income tax expense is allocated as follows:
| 2019 | 2018 | |||||
| Current tax (recovery) expense | $ | 86,077 | $ | (741,938 | ) | |
| Deferred tax (recovery) expense | - | (69,255 | ) | |||
| $ | 86,077 | $ | (811,193 | ) |
The Company has approximately $35,200,000 in net operating loss carry forwards for U.S. Federal and state purposes. The Company also has approximately $49,000 in federal tax credits as of December 31, 2019. All but $9,700,000 of the Federal net operating loss carryforward, and all of the Federal tax credits begin to expire in 2028. The $9,700,000 Federal net operating loss carryforward generated for tax years starting on or after January 1, 2018 has an unlimited carryforward period. The state net operating loss carryforward begins to expire in 2036. The Company has established a valuation allowance related to these carryforwards, as the Company has not established that it is more likely than not that the benefit of such carryforwards will be realized. The Company files income tax returns in the United States federal jurisdiction and various state jurisdictions. The Company is subject to examination by taxing authorities for the tax years ending December 31, 2013 through 2019.
The Company has approximately $2,000,000 of Canadian operating tax losses and $840,000 of capital loss carry forwards. The operating tax losses expire by 2039. The capital loss carry forward may be carried forward indefinitely, but can only be used to reduce capital gains.
The Company files income tax returns with the Canada Revenue Agency. The Company is subject to examination by taxing authorities for the tax years ending December 31, 2014 through 2019.
The Company has approximately $3,100,000 of foreign tax losses which will generally expire between 2020 and 2029.
Nerium Biotechnology, Inc. |
Notes to the Consolidated Financial Statements |
16. Contingencies and Commitments
Contingencies
Due to the nature of the industry in which the Company operates, it is possible during the normal course of business the Company may be named as a defendant in a lawsuit relating to the use of its skincare products, which were previously distributed by NI. Management does not expect any such potential claims pertaining to the product sold by NI to have a material effect on the consolidated financial statements.
Although the prior litigation was dismissed in July 2018, in April 2019, Neora filed an Arbitration Demand and Statement of Claim with the American Arbitration Association (AAA). In May 2019, the Company asserted counterclaims against Neora in arbitration. In July 2019, Neora filed a request for emergency relief in the arbitration seeking a ruling that all future settlement payments by Neora to NBI may be paid into escrow until the conclusion of the arbitration proceeding. In August 2019, the AAA appointed an interim arbitrator to hear Neora's request for emergency relief, and the interim arbitrator granted Neora's request. Neora subsequently made two quarterly installment payments of $333,333, representing the amount due to the Company on July 25, 2019 and October 25, 2019, into escrow in the total amount of $666,666 and additional payments of $333,333 in January 2020 and April 2020. In October 2019, the Company filed an arbitration demand and statement of claim against Jeff Olson and JO Products seeking payment in full of the outstanding settlement under the separate Guarantee executed between the Company, Jeff Olson and JO Products, the sole owners of Neora. The initial presentation under this request was made by both parties before the designated arbitrator on April 8, 2020. On April 23, 2020, the arbitrator rendered a ruling affirming Neora's emergency relief, while affirming the owners of Neora's unconditional guarantee of payment to the Company should Neora not remit the final payments under the Settlement agreement including amounts currently held in escrow regardless of the final ruling on the breach of contract arbitration currently on-going (and expected to be settled in September 2020).
In July 2019, the Company filed a Complaint and Application For Temporary Restraining Order And Preliminary Injunction in Aid of Arbitration (the "Complaint") in the United States Federal District Court for the Northern District of Texas alleging that Neora has violated the Lanham Act, 15 U.S.C. Sec. 1125(a) for false advertising including the use of at least twenty-three before and after photos of customers showing results allegedly obtained from use of Neora's new skin care products but that were not. Within twenty-four hours of the Company's filing of the Complaint, Neora began deleting the allegedly false advertisements that were the subject of the Complaint and promised to not use those advertisements in the future. Accordingly, on August 12, 2019, the Company dismissed the Complaint without prejudice but will continue to pursue non-injunctive relief (e.g., money damages) in arbitration. The arbitration schedule has been set for hearing in September 2020. Although the matter is ongoing and the Company cannot predict the outcome with certainty, it believes it will receive a favorable ruling.
The Company has provided partial guarantees against a line of credit and certain capital lease obligations of a supplier in which the Company holds a 15.53% equity interest. The amount that NSC is at risk with respect to the combined guarantees of the supplier's indebtedness is $73,067 (2018 - $90,800). The primary security that the supplier has provided to its lenders is an assignment of its accounts receivable and inventory against its line of credit and an assignment of the equipment and leasehold against its capital lease obligation.
In addition, the Company is committed to the following:
(a) The Company has entered into two separate agreements with one individual. The first agreement, a production and purchasing agreement effective June 2004, entitles the individual to receive $3.25 per vial of Anvirzel sold to third parties in exchange for the use of facilities and production supervision. The second agreement, a consulting agreement effective January 2007, entitles the individual to receive an additional $3.25 per vial of Anvirzel sold to third parties in exchange for consulting services in relation to the production of Anvirzel. Both agreements remain in effect for as long as Anvirzel is produced in Honduras. The commissions paid are not significant and are included in cost of sales.
(b) The Company has entered into an agreement which entitles an individual that coordinates patient services in relation to Anvirzel to receive $125 per vial purchased by patients using his services. The amount paid during the year ended December 31, 2019 was $ $11,813 (2018 - $29,650) and is included in cost of sales.
(c) Prior to 2004, the Company entered into a consulting agreement which entitles the consultant to receive $1.00 per vial of Anvirzel sold to third parties in Central America and $2.00 per vial for patients coming from countries other than Central America, to a maximum of $20,000 per month. The commissions paid are not significant and are included in cost of sales.
(d) During 2011, the Company entered into an agreement with a consultant, whereby the consultant will receive a 5% commission, based on a per unit price charged on each product produced for commercial sale to the end customer that was formulated by the consultant. The agreement expires in 2031. The commission incurred during the year ended December 31, 2019 was $nil (2018 - $2,752) and is included in cost of sales.
Nerium Biotechnology, Inc. |
Notes to the Consolidated Financial Statements |
(e) On May 5, 2014, the Company entered into an agreement with an employee to continue managing the harvests of the next 1,200,000 pounds of biomass at a price of $2.50 per pound. In September 2019 a harvest of 25,740 pounds of biomass was harvested for which the Company incurred an expense of $64,350 in accordance with this agreement.
17. Subsequent Events
COVID-19 is having a significant effect on overall economic conditions in the United States. Management's top priority is to protect the Company's employees and their families, as well as its customers. All precautionary measures as directed by health authorities and local and national governments have been considered and implemented. Management continues to monitor the outbreak of COVID-19 and other closures, or closures for a longer period of time, may be required to help ensure the health and safety of the Company's employees and its customers. COVID-19 has, and may continue to have, an effect on ports and trade, as well as global travel. Given the dynamic nature of these circumstances, the duration of business disruption and reduced customer traffic, the impact on the Company's results of operations, financial position and liquidity cannot be reasonably estimated but if the pandemic continues, it will have an adverse effect on the Company's results of future operations, financial position and liquidity in 2020.
In March 2020 the Company secured $1 million of funding through a convertible debenture financing arranged with an existing shareholder. The debenture bears interest at a stated rate of 6% with quarterly interest payments. The Holder may elect to convert all or portion of the outstanding principal balance and all accrued interest owing under the debenture into common stock at a conversion price equal to $0.50 per share.
Under the CARES Act enacted in March of 2020, corporations are allowed to carry back net operating losses arising in 2018, 2019 and 2020 to the five prior tax years. The estimated IRS tax refund Nerium Skincare Inc. is expected to claim by carrying back 2018 and 2019 net operating losses is estimated to be approximately $1,440,000.
(b) Exhibits
The following documents are included as exhibits to this Form 10.
Exhibit No. | Title of Document |
2006 Incentive Stock Option Plan, as amended on Jan. 2, 2012 | |
10.1 | Marketing / Distribution Agreement between Nerium Biotechnology, Inc. and PURE Gen Holdings, Inc. dated April 19, 2019* |
Employment Agreement between Nerium Biotechnology, Inc. and Dennis R. Knocke, dated August 17, 2015 | |
Employment Agreement between Nerium Biotechnology, Inc. and Joseph B. Nester, dated August 17, 2015 | |
16.1 | Letter Regarding Change in Certifying Accountants* |
21.1 | List of Subsidiaries of the Registrant* |
* To be Filed by Amendment.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
| NERIUM BIOTECHNOLOGY, INC. | ||
| Date: June 16, 2020 | By: | /s/ Dennis Knocke |
| Dennis Knocke, President and Chief Executive Officer | ||