What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-10 compared with 2021-08-16 · 59 added, 91 removed, 128 unchanged (54% of the section changed)

25 unchanged sentences

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.

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 manufacture high water content, electron beam cross-linked, aqueous polymer hydrogels, or gels, used for wound care, medical diagnostics, transdermal drug delivery and cosmetics.

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.

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.

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.

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):

Accounts receivable, net

Prepaid expenses and other current assets

Property and equipment, net

Operating lease - right of use asset

Accounts payable

Accrued expenses and other current liabilities

Operating lease liability

Long-term operating lease liability

Total liabilities

Net liabilities assumed in Spin-Off on June 21, 2019

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

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.

We have historically served as a contract manufacturer, supplying our gels to third parties who incorporate them into their own products and have recently began producing our own consumer products using our gels focused on proprietary branded products and white label opportunities.

Both our gels and our consumer products are manufactured using proprietary and non-proprietary mixing, coating and cross-linking technologies.

Together, these technologies enable us to produce gels that can satisfy rigid tolerance specifications with respect to a wide range of physical characteristics (e.g., thickness, water content, adherence, absorption, moisture vapor transmission rate (a measure of the passage of water vapor through a substance) and release rate) while maintaining product integrity.

Additionally, we have the manufacturing ability to offer broad choices in the selection of liners onto which the gels are coated.

Consequently, we and our customers are able to determine tolerances in moisture vapor transmission rate and active ingredient release rates while personalizing color and texture.

Results of Operations

Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020

The following sections discuss and analyze the changes in the significant line items in our statements of operations for the comparison periods identified.

Comparison of the Three Months ended September 30, 2021 and 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.

For the three months ended September 30, 2021, revenues increased by $93,000 to $335,000 when compared to $242,000 for the three months ended September 30, 2020.

The increase in our overall revenues was predominantly due to growth of consumer product sales and finished good custom white-label sales.

The branded product sales increased growth, however, there was a decrease in our historical legacy revenue due to certain customers experiencing supply chain packaging delays related to COVID-19 in 2021.

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):

Our gross loss was $57,000 for the three months ended September 30, 2021, compared to a gross loss of $27,000 for the three months ended September 30, 2020.

The gross loss recorded for the three months ended September 30, 2021, as compared to a gross profit recorded for the three months ended September 30, 2020, was primarily due to a significant cost associated with the supplemental staffing requirements in the current quarter.

On a percentage basis, our gross loss was approximately (17)% for the three months ended September 30, 2021.

Gross loss for the three months ended September 30, 2020 was approximately (11)%.

The components of cost of revenues are as follows for the three months ended September 30, 2021 and 2020 ($ in thousands):

Three Months Ended

September 30,

Cost of revenues

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Total cost of revenues

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.

Cost of revenues increased by $123 thousand to $392 thousand for the three months ended September 30, 2021, as compared to $269 thousand for the three months ended September 30, 2020.

The increase in cost of revenues 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, which we believe will increase our gross margins as the fixed cost of the facilities will not increase on a proportional basis.

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):

The following table highlights selling, general and administrative expenses by type for the three months ended September 30, 2021 and 2020 ($ in thousands):

Three Months Ended

September 30,

Selling, general and administrative expenses

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Total selling, general and administrative expenses

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.

Selling, general and administrative expenses increased by $45,000 to $553,000 for the three months ended September 30, 2021, as compared to $508,000 for the three months ended September 30, 2020.

The increase in selling, general and administrative expenses is primarily attributable to our decrease in compensation and benefits and our share-based compensation offset by higher costs for professional fees and other administrative expenses.

Compensation and benefits declined by $45,000 to $87,000 for the three months ended September 30, 2021, as compared to $132,000 for the three months ended September 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.

Share-based compensation was $45,000 for the three months ended September 30, 2021, which is related to stock option expense of $24,000 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 $83,000 for the three months ended September 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 $167,000 to $418,000 for the three months ended September 30, 2021 from $251,000 for the three months ended September 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

Comparison of the Nine Months Ended September 30, 2021 and 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.

For the nine months ended September 30, 2021 revenues were $1,018,000 and increased by $445,000 when compared to $573,000 for the nine months ended September 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.

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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

Our gross loss was ($95,000) for the nine months ended September 30, 2021 compared to a gross loss of ($153,000) for the nine months ended September 30, 2020.

The loss recorded for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, was primarily due to the higher volume of contract manufacturing sales and lower manufacturing labor costs.

Gross loss was approximately -9% for the nine months ended September 30, 2021.

Gross profit was (26.7)% for the nine months ended September 30, 2020.

The components of cost of revenues are as follows for the nine months ended September 30, 2021 and 2020 ($ in thousands):

Nine Months Ended

September 30,

Cost of revenues

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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

The following table highlights selling, general and administrative expenses by type for the nine months ended September 30, 2021 and 2020 ($ in thousands):

Nine Months Ended

September 30,

Selling, general and administrative expenses

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Total selling, general and administrative expenses

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.

Selling, general and administrative expenses increased by $157,000 to $1,588,000 for the nine months ended September 30, 2021, as compared to $1,431,000 for the nine months ended September 30, 2020.

The increase in selling, general and administrative expenses is primarily attributable to a decrease in compensation and benefits as well as other expenses and professional fees offset by an increase in share-based compensation as compared to the prior year period.

Compensation and benefits decreased by $91,000 to $259,000 for the nine months ended September 30, 2021, as compared to $350,000 for the nine months ended September 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.

Share-based compensation was $230,000 for the nine months ended September 30, 2021, which is related to stock option expense of $167,000 to a director and a strategic advisor and $63,000 related to the vesting of restricted awards to our Chief Executive Officer.

Other Expenses and Professional fees increased by $243,000 to $1,089,000 for the nine months ended September 30, 2021 from $846,000 for the nine months ended September 30, 2020.

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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.

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.

As of September 30, 2021, we had $1.3 million of cash, compared to $32 thousand of cash at December 31, 2020.

Net cash used in operating activities was $1.5 million and $1.4 million for the nine months ended September 30, 2021 and 2020, respectively.

Net cash used in investing activities during the nine months ended September 30, 2021 was $390 thousand related to facility upgrade costs.

Net cash used in investing activities was $152 thousand for the nine months ended September 30, 2020 related to equipment purchases.

Net cash provided by financing activities for the nine months ended September 30, 2021 was $3.2 million which is attributable to the issuance of common stock of $285 thousand and proceeds of notes payable of $15 thousand and proceeds from the PPP loan of $128 thousand and convertible notes payable of $2.8 million.

Net cash provided by financing activities for the nine months ended September 30, 2020 was $1.4 million which is attributable to the issuance of common stock of $1.0 million and proceeds of a notes payable of $408,000.

At September 30, 2021, current assets totaled $1,810,000 and current liabilities totaled $2,409,000, as compared to current assets totaling $363,000 and current liabilities totaling $1,331,000 at December 31, 2020.

As a result, we had working capital deficit of $599,000 at September 30, 2021, compared to a working capital deficit of $887,000 at December 31, 2020.

The decrease in the working capital deficit as of September 30, 2021 is primarily attributable to the capital raised and additional convertible notes payable due in March 2022 and September 2022.

On September 2, 2021, the Company entered into a securities purchase agreement pursuant to which the Company issued to twenty investors a 12% senior secured convertible promissory note in the principal amount of $1,814,000, including Original Issue Discount (OID) of $194,400, which is convertible into shares of the Company's common stock at a price per share of $0.15.

The net proceeds received by the Company were $1,504,400 after deducting fees and expenses related to the transaction.

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 principal amount of $1,680,000, including Original Issue Discount (OID) of $180,000, 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.

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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),

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.

As of September 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), 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

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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.

Warrant Liability – Warrants to purchase common stock were issued in connection with equity financing raises which occurred on September 2, 2021, 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.

17 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis