Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed financial statements and related notes above.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements,” which include information relating to future events, future financial performance, strategies, expectations, competitive environment and regulation. Words such as “may,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will actually be achieved. Forward-looking statements are based on information we have when those statements are made or our management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:
● our ability to continue as a going concern;
● inadequate capital;
● inadequate or an inability to raise sufficient capital to execute our business plan;
● our ability to comply with current good manufacturing practices;
● loss or retirement of key executives;
● our plans to make significant additional outlays of working capital before we expect to generate significant revenues and the uncertainty regarding when we will begin to generate significant revenues, if we are able to do so;
● adverse economic conditions and/or intense competition;
● loss of a key customer or supplier;
● entry of new competitors;
● adverse federal, state and local government regulation;
● technological obsolescence of our manufacturing process and equipment;
● technical problems with our research and products;
● risks of mergers and acquisitions including the time and cost of implementing transactions and the potential failure to achieve expected gains, revenue growth or expense savings;
● price increases for supplies and components; and
● the inability to carry out our business plans.
28
Table of Contents
For a discussion of these and other risks that relate to our business and investing in shares of our common stock, you should carefully review the risks and uncertainties described elsewhere in this Quarterly Report on Form 10-Q. The forward-looking statements contained in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. We do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events.
Overview
We manufacture a high-water content, electron beam cross-linked, aqueous polymer hydrogels, or gels, used for wound care, medical diagnostics, transdermal drug delivery and cosmetics. We believe that we are one of the leading manufacturers of high-performance gels in the United States. We specialize in custom gels by capitalizing on proprietary manufacturing technologies. We have historically served as a contract manufacturer, supplying our gels to third parties who incorporate them into their own products. Our contract manufacturing business provides custom hydrogels to the OEM market. We have recently launched an initiative to produce and market consumer products based on our unique technology. We believe there will be significant interest for applications in beauty and cosmetics, foot care, and over the counter remedies.
The Spin-Off
On June 21, 2019, AquaMed became an independent company through the pro rata distribution (“Spin-Off”) by Adynxx, Inc. (“Adynxx” and the “Parent”) in connection with the closing of a reverse merger between Adynxx, Inc. and Alliqua BioMedical, Inc., of AquaMed’s common stock for common stock of Parent. Adynxx, Inc. was previously known as Alliqua BioMedical, Inc. and subsequently changed its name to Adynxx, Inc. on May 3, 2019. The terms and conditions of the Spin-Off provided that each record holder of Parent stock as of April 22, 2019, received one share of AquaMed common stock in book-entry form and resulted in the distribution of 5,005,211 shares of common stock of AquaMed. Following the distribution (“Capitalization”), all existing operations were distributed to AquaMed with the exception of a corporate lease for property in Yardley, Pennsylvania which was retained by Adynxx, Inc.
Following the distribution (“Capitalization”), all existing operations were distributed to AquaMed with the exception of a corporate lease for property in Yardley, Pennsylvania which was retained by Adynxx, Inc.
Pursuant to the Spin-Off and in exchange for the 5,005,211 shares of common stock, NexGel assumed the following net assets and liabilities from Parent as of June 21, 2019 ($ in thousands):
Assets:
Cash
$
186
Accounts receivable, net
72
Inventory
140
Prepaid expenses and other current assets
101
Property and equipment, net
155
Operating lease - right of use asset
976
Other assets
178
Total assets
1,808
Liabilities:
Accounts payable
(496)
Accrued expenses and other current liabilities
(395)
Operating lease liability
(976)
Long-term operating lease liability
Total liabilities
(1,867)
Net liabilities assumed in Spin-Off on June 21, 2019
$
(59)
Basis of Presentation
These interim condensed financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"), which permit reduced disclosure for interim periods. The condensed balance sheet as of June 30, 2021 was derived from audited financial statements for the fiscal year then ended, but does not include all necessary disclosures
29
Table of Contents
required by generally accepted accounting principles in the United States of America ("GAAP") with respect to annual financial statements. In the opinion of management, the condensed financial statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the Company’s financial position as of June 30, 2021 and results of operations and cash flows for the six months ended June 30, 2021 and 2020. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto in the Company’s year-end financial statements for the years ended December 31, 2020 and 2019, which are included in the Company’s Form 10-K filed with SEC on March 31, 2021. Results for interim periods are not necessarily indicative of the results to be expected for a full fiscal year or for any future period.
Recent developments
The Company’s wholly-owned subsidiary NexGelRX, Inc. conducted proof of concept studies for the development of its first medical device, which we call (“Nexdrape”) and filed for patents on this device. The Nexdrape device is an incise surgical drape designed for patients with impaired skin. The elderly, diabetics, trauma patients and those with an adhesive sensitivity can have adverse events from the removal of adhesive drapes. These groups represent a sizable percentage of the market. Skin tears, infections, rashes, and post-surgical site pain are some of the problems that can occur, and have been reported with other currently available surgical drapes. We believe Nexdrape will represent a gentle to the skin alternative to the current adhesive based standard of care. The Company intends to file a 510(k) premarket submission with the Food and Drug Administration (FDA), which is an application to demonstrate that Nexdrape is as safe and effective (or substantially equivalent to) a legally marketed surgical drape device. There can be no guarantee that the FDA approves our application, if submitted.
Results of Operations
Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020
Revenues, net . For the three months ended June 30, 2021, revenues increased by $326,000 to $417,000 when compared to $91,000 for the three months ended June 30, 2020. The increase in our overall revenues was predominantly due to initiation of consumer product sales and finished good custom white-label sales. There was a decrease in our historical legacy revenue due to certain customers experiencing supply chain delays related to Covid-19 in 2020.
Gross profit (loss) . Our gross profit was $4,000 for the three months ended June 30, 2021, compared to a gross loss of $85,000 for the three months ended June 30, 2020. The gross income recorded for the three months ended June 30, 2021, as compared to a gross loss recorded for the three months ended June 30, 2020, was primarily due to a significant cost associated with restart of our plant accelerator post upgrade. On a percentage basis, our gross profit was approximately 1% for the three months ended June 30, 2021. Gross loss for the three months ended June 30, 2020 was approximately 93%.
The components of cost of revenues are as follows for the three months ended June 30, 2021 and 2020 ($ in thousands):
Three Months Ended
June 30,
2021
2020
Cost of revenues
Materials and finished products
$
171
$
46
Share-based compensation
—
1
Compensation and benefits
134
118
Depreciation and amortization
22
7
Equipment, production and other expenses
86
4
Total cost of revenues
$
413
$
176
Cost of revenues increased by $237 thousand to $413 thousand for the three months ended June 30, 2021, as compared to $176 thousand for the three months ended June 30, 2020. The increase in cost of revenues is primarily attributable was primarily due to a significant cost associated with restart of the plant accelerator post upgrade and increased material and finished products associated with increased revenue. The company anticipates increased utilization of the facility is the current year.
30
Table of Contents
Selling, general and administrative expenses . The following table highlights selling, general and administrative expenses by type for the three months ended June 30, 2021 and 2020 ($ in thousands):
Three Months Ended
June 30,
2021
2020
Selling, general and administrative expenses
Compensation and benefits
$
83
$
113
Share-based compensation
95
39
Depreciation and amortization
4
4
Other expenses and professional fees
375
299
Total selling, general and administrative expenses
$
557
$
455
Selling, general and administrative expenses increased by $102,000 to $557,000 for the three months ended June 30, 2021, as compared to $455,000 for the three months ended June 30, 2020. The increase in selling, general and administrative expenses is primarily attributable to our higher costs for professional fees and other administrative expenses.
Compensation and benefits declined by $30,000 to $83,000 for the three months ended June 30, 2021, as compared to $113,000 for the three months ended June 30, 2020. The company’s adjustments to staffing resulted in a compensation decrease compared to the prior year period.
Share-based compensation was $95,000 for the three months ended June 30, 2021, which is related to stock option expense of $74,000 to a director and a strategic advisor and $21,000 related to the vesting of restricted awards to our Chief Executive Officer. Share-based compensation was $39,000 for the three months ended June 30, 2020, which is related to the issuance of 5,714,282 stock options and the issuance of restricted awards to our Chief Executive Officer.
Other Expenses and professional fees increased by $76,000 to $375,000 for the three months ended June 30, 2021 from $299,000 for the three months ended June 30, 2020. Other selling, general and administrative expenses generally consist of costs associated with our selling efforts and general management, including information technology, travel, training and recruiting. We continued to incur legal, accounting and consulting fees associated with public company governance requirements, however, the increase in professional fees compared to the prior year period was the primary result of professional fees incurred in preparation for a planned exchange listing.
Six months Ended June 30, 2021 Compared to the Six months Ended June 30, 2020
Revenues, net . For the six months ended June 30, 2021 revenues were $683,000 and increased by $352,000 when compared to $331,000 for the six months ended June 30, 2020. The increase in our overall revenues was predominantly due to initiation of consumer product sales and finished good custom white-label and branded product sales. There was a decrease in our historical legacy revenue due to certain customers experiencing supply chain delays related to Covid-19 during 2020.
Gross profit (loss) . Our gross loss was $39,000 for the six months ended June 30, 2021 compared to a gross loss of $18,000 for the six months ended June 30, 2020. The loss recorded for the six months ended June 30, 2021, as compared to the six months ended June 30, 2020, was primarily due to the higher volume of contract manufacturing sales and lower manufacturing labor costs. Gross loss was approximately 6% for the six months ended June 30, 2021. Gross loss was 5% for the six months ended June 30, 2020.
The components of cost of revenues are as follows for the six months ended June 30, 2021 and 2020 ($ in thousands):
Six Months Ended
June 30,
2021
2020
Cost of revenues
Materials and finished products
$
231
$
84
Share-based compensation
—
1
Compensation and benefits
262
240
Depreciation and amortization
43
14
Equipment, production and other expenses
186
10
31
Table of Contents
Total cost of revenues
$
722
$
349
Selling, general and administrative expenses. The following table highlights selling, general and administrative expenses by type for the six months ended June 30, 2021 and 2020 ($ in thousands):
Six Months Ended
June 30,
2021
2020
Selling, general and administrative expenses
Compensation and benefits
$
172
$
218
Share-based compensation
185
103
Depreciation and amortization
7
7
Other expenses and professional fees
670
703
Total selling, general and administrative expenses
$
1,034
$
1,031
Selling, general and administrative expenses increased by $3,000 to $1,034,000 for the six months ended June 30, 2021, as compared to $1,031,000 for the six months ended June 30, 2020. The increase in selling, general and administrative expenses is primarily attributable to increased share-based compensation offset by lower costs for professional fees, executive compensation and other administrative expenses compared to the prior year period.
Compensation and benefits decreased by $46,000 to $172,000 for the six months ended June 30, 2021, as compared to $218,000 for the six months ended June 30, 2020. The number of employees increased compared to the prior period, however, adjustments to staffing compensation resulted in a decrease compared to the prior year period.
Share-based compensation was $185,000 for the six months ended June 30, 2021, which is related to stock option expense of $143,000 to a director and a strategic advisor and $42,000 related to the vesting of restricted awards to our Chief Executive Officer
Other Expenses and Professional fees decreased by $33,000 to $670,000 for the six months ended June 30, 2021 from $703,000 for the six months ended June 30, 2020. Other selling, general and administrative expenses generally consist of costs associated with our selling efforts and general management, including information technology, travel, training and recruiting. We continued to incur legal, accounting and consulting fees associated with public company governance requirements, however, the decrease in professional fees compared to the prior year period was the primary result in the cost reduction, offset by professional fees incurred in preparation for a planned exchange listing.
Liquidity and Capital Resources
As of June 30, 2021, we had $382 thousand of cash, compared to $32 thousand of cash at December 31, 2020. Net cash used in operating activities was $1 million and $980 thousand for the six months ended June 30, 2021 and 2020, respectively.
Net cash used in investing activities during the six months ended June 30, 2021 was $267 thousand related to facility upgrade costs. Net cash used in investing activities was $ 76 thousand for the six months ended June 30, 2020 related to equipment purchases.
Net cash provided by financing activities for the six months ended June 30, 2021 was $1.7 million which is attributable to the issuance of common stock of $285 thousand and proceeds of a notes payable of $15 thousand and proceeds from the PPP loan of $128 thousand and convertible notes payable of $1.3 million. Net cash provided by financing activities for the six months ended June 30, 2020 was $1 million which is attributable to the issuance of common stock and proceeds of a notes payable of $408,000.
At June 30, 2021, current assets totaled $909,000 and current liabilities totaled $1,769,000, as compared to current assets totaling $363,000 and current liabilities totaling $1,332,000 at December 31, 2020. As a result, we had working capital deficit of $860,000 at June 30, 2021, compared to a working capital deficit of $969,000 at December 31, 2020. The decrease in the working capital deficit as of June 30, 2021 is primarily attributable to the capital raised and additional convertible notes payable due in March 2022.
On March 11, 2021, the Company entered into a securities purchase agreement with Auctus Fund, LLC, a Delaware limited liability company (“Auctus”), pursuant to which the Company issued to Auctus a 12% senior secured convertible promissory note in the
32
Table of Contents
principal amount of $1,500,000 which is convertible into shares of the Company’s common stock at a price per share of $0.10. The net proceeds received by the Company were $1,337,000 after deducting fees and expenses related to the transaction.
On March 4, 2021, the Company received a second PPP Loan in the amount of $128 thousand under Phase II of the Paycheck Protection Program which commenced on January 13, 2021 and allowed certain businesses that received an initial PPP Loan to seek a second draw PPP Loan.
On January 19, 2021, the Company issued a $15,000 secured convertible promissory note which was convertible into shares of the Company’s common stock at a price per share of $0.03. The note was due on or before March 19, 2021 and fully-repaid (including all accrued but unpaid interest) on March 14, 2021.
From January 1, 2021 through March 31, 2021, the Company entered into securities purchase agreements with certain accredited investors whereby we sold 3,563,000 shares of our common stock at a price per share equal to $0.08 for an aggregate purchase price of $285,000.
We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we anticipate that all available funds and any earnings generated in our business will be used to finance the growth of our business and will not be paid out as dividends to our shareholders. Any future determination related to our dividend policy will be made at the discretion of our Board of Directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our Board of Directors may deem relevant.
The Company is in the process of expanding its customer base to increase revenue in order to alleviate the current going concern. Management is exploring new product channel sales in consumer products, such as cosmetics, athletic products and proprietary medical devices. The Company has increased its focus on sales and developing a sales pipeline for potential customers. This customer base expansion will enable us to provide financial stability for the foreseeable future, expand our current processes, and position us for long-term shareholder value creation.
Moving forward, the Company will potentially be raising additional capital and focusing on increasing revenues for the business to stabilize and become profitable. The Company will maintain and attempt to grow the existing contract manufacturing business. The Company plans to continue building and developing its catalog of consumer products for sale to branding partners. Thirdly, we will use our in house capabilities to create and test market additional branded products. These products will be target marketed and sold online through social media, television and online market places.
We expect to continue incurring losses for the near-term future and may need to raise additional capital to support ongoing operations. Our ability to continue to operate as a going concern is dependent upon our ability to raise additional capital and to ultimately achieve profitable operations. Management is evaluating various options to raise capital to funds the Company’s working capital requirements through equity offerings. There can be no assurances, however, that management will be able to obtain sufficient additional funds when needed, or that such funds, if available, will be obtained on terms satisfactory to us. These factors raise substantial doubt as to our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and liabilities that might be necessary should we be unable to continue as a going concern.
On January 30, 2020, the World Health Organization declared the coronavirus outbreak a "Public Health Emergency of International Concern" and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. The coronavirus and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. While it is unknown how long these conditions will last and what the complete financial effect will be to the Company, to date, the Company could experience declining revenue, labor and supply shortages, or difficulty in raising additional capital. Our concentrations with a few customers and one supplier make it reasonably possible that we are vulnerable to the risk of a near-term severe impact.
Additionally, it is reasonably possible that estimates made in the financial statements have been, or will be, materially and adversely impacted in the near term as a result of these conditions, including the recoverability of long-lived assets.
Off Balance Sheet Arrangements
As of June 30, 2021, we had no off-balance sheet arrangements in the nature of guarantee contracts, retained or contingent interests in assets transferred to entities (or similar arrangements serving as credit, liquidity or market risk support to entities for any such assets),
33
Table of Contents
or obligations (including contingent obligations) arising out of variable interests in entities providing financing, liquidity, market risk or credit risk support to us, or that engage in leasing, hedging or research and development services with us.
Critical Accounting Policies and Estimates
The preparation of our Financial Statements in accordance with generally accepted accounting principles is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. We consider the accounting policies discussed below to be critical to the understanding of our Financial Statements. Actual results could differ from our estimates and assumptions, and any such differences could be material to our Financial Statements.
Share-based compensation – We utilize share-based compensation in the form of incentive stock options. The fair values of incentive stock option award grants are estimated as of the date of grant using a Black-Scholes option valuation model. Compensation expense is recognized in the statements of operations on a straight-line basis over the requisite service period, which is generally the vesting period required to obtain full vesting. The expected term of the awards granted is estimated using the simplified method which computes the expected term as the sum of the award’s vesting term plus the original contractual term divided by two.
Warrant Liability – Warrants to purchase common stock were issued in connection with equity financing raises which occurred on March 11, 2021, February 3, 2021, December 24, 2020, March 18, 2020, September 10, 2019 and November 6, 2019. The fair values of the warrants are estimated as of the date of issuance and again at each period end using a Black-Scholes option valuation model. At issuance, the fair value of the warrant is recognized as an equity issuance cost within additional paid-in-capital. Fair value adjustments to the warrant liability are recognized in other income (expense) in the statements of operations. The expected term of the awards granted are based on the 3 year contractual expiration date.
Black Scholes Inputs - The fair value of each stock option award and warrant issued was estimated on the date of grant using a Black-Scholes option-valuation model, which requires management to make certain assumptions regarding: (i) fair value of the common stock that underlies the stock option; (ii) the expected volatility in the market price of our common stock; (iii) dividend yield; (iv) risk-free interest rates; and (iv) the period of time employees are expected to hold the award prior to exercise (referred to as the expected term). Under the Black-Scholes option-valuation model, entities typically estimate the expected volatility based on historical volatilities of the entity’s own common stock. Based on the lack of historical data of volatility for the Company’s common stock, the Company based its estimate of expected volatility on a weighted average of the historical volatility of comparable public companies that manufacture similar products and are similar in size, stage of life cycle, and financial leverage. The fair value of the common stock that underlies the stock option is estimated by the Company considering the price of the most recent issuance of the Company’s common stock. The dividend yield is based upon the assumption that the Company will not declare a dividend over the life of the options. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for bonds with maturities consistent with the expected term of the related award.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.