What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-15 compared with 2022-11-08 · 147 added, 207 removed, 124 unchanged (74% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

following discussion and analysis are intended to help prospective investors understand our business, financial condition, results of

operations, liquidity and capital resources.

You should read this discussion in conjunction with our financial statements and related

notes thereto included elsewhere in this information statement.

statements in this discussion regarding industry outlook, expectations regarding our future performance, liquidity and capital resources

and other non-historical statements are forward-looking statements.

These forward-looking statements are subject to numerous risks and

uncertainties, including, but not limited to, the risks and uncertainties described in “Special Note Regarding Forward-Looking

Statements.” Actual results may differ materially from those contained in any forward-looking statements.

NexGel Financial Statements, discussed below, reflect the NexGel financial condition, results of operations, and cash flows.

The financial

information discussed below and included in this information statement, however, may not necessarily reflect what the NexGel financial

condition, results of operations, or cash flows would have been had NexGel been operated as a separate, independent entity during the

years presented, or what the NexGel financial condition, results of operations, and cash flows may be in the future.

Forward-Looking

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of water vapor through a substance] and release rate) while maintaining product integrity.

Additionally, we have the manufacturing capability

Additionally, we have the manufacturing ability

to offer broad choices in the selection of liners onto which the gels are coated.

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tolerances in moisture vapor transmission rate and active ingredient release rates while personalizing color and texture.

March 1, 2023, the Company acquired of 50% interest in a newly formed joint venture (“JV”), CG Converting and Packaging,

LLC, with C.G.

Laboratories Inc.

(“CG Labs”) for its converting and packaging business.

The agreement is effective March

As a result of this transaction, the Company owns 50% of the JV, with the remaining 50% held by CG Labs.

of Operations

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

of the Three Months ended September 30, 2022 and 2021

the three months ended September 30, 2022 revenues were $568 thousand and increased by $233 thousand, or 69.6%, when compared to

$335 thousand for the three months ended September 30, 2021.

The increase in our overall revenues was primarily due to sales growth

in branded consumer products and our contract manufacturing products.

profit (loss) .

Our gross profit was $148 thousand for the three months ended September 30, 2022 compared to a gross loss of $57 thousand

for the three months ended September 30, 2021.

The profit recorded for the three months ended September 30, 2022, as compared to a loss

recorded for the three months ended September 30, 2021, was primarily due to the higher volume of contract manufacturing sales against

Gross profit was approximately 26% for the three months ended September 30, 2022 compared to a gross loss of (17)% for the

three months ended September 30, 2021.

The Company anticipates continued improvement in gross margins due to both increased revenue against

fixed facility expenses and larger productions runs on commercially proven products.

components of cost of revenues are as follows for the three months ended September 30, 2022 and 2021 ($ in thousands):

Three Months Ended

September 30,

Cost of revenues

Materials and finished products

Compensation and benefits

Depreciation and amortization

Equipment, production and other expenses

Total cost of revenues

of revenues increased by $28 thousand, or 7.1%, to $420 thousand for the three months ended September 30, 2022, as compared to $392 thousand

for the three months ended September 30, 2021.

The increase in cost of revenues is primarily aligned with the revenue growth in the current

general and administrative expenses .

The following table highlights selling, general and administrative expenses by type for the

three months ended September 30, 2022 and 2021 ($ in thousands):

Three Months Ended

September 30,

Selling, general and administrative expenses

Compensation and benefits

Share-based compensation

Depreciation and amortization

Other expenses and professional fees

Total Selling, general and administrative expenses

general and administrative expenses increased by $439 thousand, or 79.4%, to $992 thousand for the three months ended September 30,

2022, as compared to $553 thousand for the three months ended September 30, 2021.

The increase in selling, general and

administrative expenses is primarily attributable to an increase of franchise tax expense, increased research and development

investment and the costs for professional fees and other administrative expenses in the current period associated with public

company governance requirements.

The exceptionally high franchise tax charge of $220 thousand was due to the company’s IPO and

related increase in gross assets.

In August of 2022 the Company reduced its authorized shares at its annual

stockholders’ meeting.

The result of this reduction, assuming a similar asset base as the Company currently has will reduce

the 2023 franchise tax liability to approximately $28 thousand.

and benefits increased by $31 thousand, or 35.6%, to $118 thousand for the three months ended September 30, 2022, as compared to $87

thousand for the three months ended September 30, 2021.

The number of employees increased compared to the prior period and officer compensation

increased in conjunction with contract renewals.

compensation increased by $40 thousand, or 88.9%, to $85 thousand for the three months ended September 30, 2022, as compared to $45 thousand

for the three months ended September 30, 2021.

The share-based compensation related to the issuance of restricted stock awards

and options to our CEO, restricted stock awards to all employees and options to board members, employees, and advisors.

expenses and professional fees increased by $367 thousand, or 87.8%, to $785 thousand for the three months ended September 30, 2022

from $418 thousand for the three months ended September 30, 2021.

Other selling, general and administrative expenses generally

consist of costs associated with our selling efforts and general management, including information technology, travel, training and

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 primarily due to the increase in professional

fees in connection with our in the NASDAQ up-listing on December 27, 2021.

and development expenses .

Research and development expenses increased by $193 thousand for the three months ended September 30, 2022

from $0 for the three months ended September 30, 2021.

The increase is due to the initiation of two proof of concept studies for drug

delivery candidates utilizing our hydrogel technology.

of the Nine Months ended September 30, 2022 and 2021

the nine months ended September 30, 2022 revenues were $1,524 thousand and increased by $506 thousand, or 49.7%, when compared to $1,018

thousand for the nine months ended September 30, 2021.

The increase in our overall revenues was due to sales growth of new products as

well as our initiatives in custom label manufacturing and branded consumer product.

of the Three Months ended March 31, 2023 and 2022

the three months ended March 31, 2023 revenues were $620 thousand and increased by $224 thousand, or 56.6%, when compared to $396 thousand

for the three months ended March 31, 2022.

The increase in our overall revenues was primarily due to sales growth in both our contract

manufacturing and branded products, including the revenue from CG Labs from March 1, 2023 through March 31,

2023 of $189 thousand.

Company has four distinct lines of business;

Contract Manufacturing, Custom & White Label, Consumer Branded Products, and Medical

Manufacturing

order rolls of gel (“rollstock”).

The rollstock is shipped to our customers, which they package into finished goods.

Historically,

this has been the Company’s primary source of revenue.

& White Label

products often infuse various ingredients into our base gel to develop unique product offerings to satisfy market demand (e.g.

into the gel for a beauty mask).

The rollstock is converted and packaged into salable units.

The finished goods are shipped to the customer,

who is ultimately responsible for product distribution.

Frequently these products started as development deals, in which the customer

paid the company a small fee to develop a specific product.

Once completed, the customer places a large order for newly developed product.

Branded Products

products are finished goods marketed and sold directly to the customer by the Company through online and retail channels.

is responsible for sales, marketing, and distribution.

These products carry the Company’s brand names.

Devices are a hybrid business, combining elements of Custom & White Label and Consumer Branded Products.

Medical Devices, which are

not yet marketed, are expected to be distributed through strategic partnerships.

The Company will manufacture and possibly convert/package

the device while the strategic partner brings the product to market.

Small market Medical Devices could be launched by the Company, but

also be offered to a distributor to reach the full scale of the market.

profit (loss) .

Our gross profit was $220 thousand for the nine months ended September 30, 2022 compared to a gross loss of $(95)

thousand for the nine months ended September 30, 2021.

The profit recorded for the nine months ended September 30, 2022, as compared

to a loss recorded for the nine months ended September 30, 2021, was primarily due to the higher volume of contract manufacturing sales

against fixed costs.

Gross profit was approximately 14.4% for the nine months ended September 30, 2022 compared to a gross loss of (9.3)%

for the nine months ended September 30, 2021.

The components of cost of revenues are as follows for the nine months ended September 30,

2022 and 2021 ($ in thousands):

Our gross loss was $57 thousand for the three months ended March 31, 2023 compared to a gross loss of $22 thousand

for the three months ended March 31, 2022.

The increase of $35 thousand in gross loss quarter over quarter was primarily due to the higher

volume of contract manufacturing sales against fixed costs partially offset by higher manufacturing labor costs.

Gross loss was approximately

(9.2%) for the three months ended March 31, 2023 compared to a gross loss of (5.6%) for the three months ended March 31, 2022.

components of cost of revenues are as follows for the three months ended March 31, 2023 and 2022 ($ in thousands):

and finished products

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cost of revenues

of revenues increased by $191 thousand, or 17.2%, to $1,304 thousand for the nine months ended September 30, 2022, as compared to $1,113

thousand for the nine months ended September 30, 2021.

The increase in cost of revenues is primarily aligned with the new product line

growth in the current year.

of revenues increased by $259 thousand, or 62.0%, to $677 thousand for the three months ended March 31, 2023, as compared to $418 thousand

for the three months ended March 31, 2022.

The increase in cost of revenues is primarily aligned with the new product line growth and

an increase in compensation and benefits in the current year.

general and administrative expenses .

The following table highlights Selling, general and administrative expenses by type for the

nine months ended September 30, 2022 and 2021 ($ in thousands):

three months ended March 31, 2023 and 2022 ($ in thousands):

general and administrative expenses

and amortization

marketing, & Amazon fees

& shareholder services

tax & corporate insurance

& consulting fees

expenses and professional fees

Selling, general and administrative expenses

general and administrative expenses increased by $888 thousand, or 56.5%, to $2,459 thousand for the nine months ended September 30,

2022, as compared to $1,571 thousand for the nine months ended September 30, 2021.

The increase in selling, general and administrative

expenses is primarily attributable to our costs for professional fees and other administrative expenses in the current period associated

with public company governance requirements.

and benefits increased by $120 thousand, or 46.3%, to $379 thousand for the nine months ended September 30, 2022, as compared to $259

thousand for the nine months ended September 30, 2021.

The number of employees increased compared to the prior period and officer compensation

increased in conjunction with contract renewals.

compensation decreased by $11 thousand, or 4.8%, to $219 thousand for the nine months ended September 30, 2022, as compared to $230 thousand

for the nine months ended September 30, 2021.

The share-based compensation related to the issuance of restricted stock awards and

options to our CEO, restricted stock awards to all employees and options to board members, employees, and advisors.

expenses and professional fees increased by $778 thousand, or 72.6%, to $1.9 million for the nine months ended September 30, 2022

from $1.1 million for the nine months ended September 30, 2021.

Other selling, general and administrative expenses generally consist

of costs associated with our selling efforts and general management, including information technology, travel, training and

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 primarily due to the increase in

professional fees in connection with our in the NASDAQ up-listing on December 27, 2021.

Selling, general and administrative expenses increased

by $31 thousand, or 4.0%, to $797 thousand for the three months ended March 31, 2023, as compared to $766 thousand for the three months

ended March 31, 2022.

The increase in Selling, general and administrative expenses is primarily attributable to the factors described

Compensation and benefits increased by $49 thousand, or 43.8%, to $161

thousand for the three months ended March 31, 2023, as compared to $112 thousand for the three months ended March 31, 2022.

of employees decreased compared to the prior period and officer compensation increased in conjunction with contract renewals.

compensation increased by $1 thousand, or 5.6%, to $19 thousand for the three months ended March 31, 2023, as compared to $18 thousand

for the three months ended March 31, 2022.

The share-based compensation related to the issuance of stock options and restricted awards

to our officers, employees, and advisors in the prior year period.

marketing, Amazon fees increased by $55 thousand, or 141%, to $94 thousand for the three months ended March 31, 2023, as compared to

$39 thousand for the three months ended March 31, 2022.

The increase is due to the increased Amazon selling fees as well as an increase

in advertising and marketing.

and shareholder services decreased by $53 thousand, or 35.6%, to $96 thousand for the three months ended March 31, 2023, as compared

to $149 thousand for the three months ended March 31, 2022.

The decrease is due to initial fees related to the Nasdaq listing in 2022

upon the IPO occurring on December 27, 2021.

taxes and corporate insurance decreased by $5 thousand, or 10.2%, to $44 thousand for the three months ended March 31, 2023, as compared

to $49 thousand for the three months ended March 31, 2022.

and consulting fees increased by $37 thousand, or 16.4%, to $263 thousand for the three months ended March 31, 2023, as compared to $226

thousand for the three months ended March 31, 2022.

We continued to incur accounting and consulting fees associated with public company

governance requirements.

Expenses decreased by $56 thousand, or 33.7%, to $110 thousand for the three months ended March 31, 2023 from $166 thousand for the three

months ended March 31, 2022.

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.

and development expenses .

Research and development expenses increased by $311 thousand to $328 thousand for the nine months ended

September 30, 2022 from $17 thousand for the nine months ended September 30, 2021.

The increase is due to the initiation of two proof

of concept studies for drug delivery candidates utilizing our hydrogel technology as well as continuing development on the NEXDrape medical

Research and development expenses were $29 thousand and $24 thousand for the three months ended March 31,

2023 and March 31, 2022, respectively.

and Capital Resources

cash used in operating activities

cash used in investing activities

cash provided by (used in) financing activities

cash provided by investing activities

cash used in financing activities

increase (decrease) in cash and cash equivalents

and cash equivalents at beginning of period

and cash equivalent at end of period

of September 30, 2022, we had $1.4 million of cash and cash equivalents and $6.0 million of marketable securities, compared to $13.4

million of cash at December 31, 2021.

Net cash used in operating activities was $2.3 million and $1.6 million for the nine months ended

September 30, 2022 and 2021, respectively.

See Notes 2 and 3 of our financial statements above for a more detailed discussion of our

marketable securities.

cash used in investing activities was $6,068 thousand and $390 thousand for the nine months ended September 30, 2022 and 2021, respectively,

consisting of investments in marketable securities of $6,980 thousand, the sale of marketable securities for $1,000 thousand, and purchases

of capital equipment of $88 thousand for the nine months ended September 30, 2022 and purchases of capital equipment of $390 thousand

in the prior year period.

cash used by financing activities for the nine months ended September 30, 2022 was $3.5 million which is attributable to the principal

payments of convertible notes of $3.5 million.

For the nine months ended September 30, 2021 cash flows from financing activities were

$3.2 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 $127 thousand and convertible notes payable, net of $2.8 million, net of costs and principal payments of

convertible notes of $100 thousand.

September 30, 2022, current assets totaled $8.3 million and current liabilities totaled $1.1 million, as compared to current assets totaling

$13.9 million and current liabilities totaling $2.9 million at December 31, 2021.

and cash equivalents at beginning of year

and cash equivalent at end of quarter

of March 31, 2023, we had $787 thousand of cash and $5.0 million of marketable securities ,

compared to $1.1 million of cash and $5.5 million of marketable securities at December 31,

Net cash used in operating activities was $709 thousand and $797 thousand for the three months ended March 31, 2023 and 2022, respectively.

cash provided by investing activities was $397 thousand and $0 thousand for the three months ended March 31, 2023 and 2022, respectively,

consisting of the sales of marketable securities of $485 thousand and purchases of capital equipment

of $88 thousand for three months ended March 31, 2023.

There were no investing activities for the three months ended March 31,

cash used in financing activities for the three months ended March 31, 2023 and 2022 was $2 thousand and $2.0 million is

attributable to the principal payments of notes payable and convertible notes, respectively.

March 31, 2023, current assets totaled $7.3 million and current liabilities totaled $1.5 million, as compared to current assets totaling

$7.5 million and current liabilities totaling $859 thousand at December 31, 2022.

As a result, we had working capital of $5.8 million

at September 30, 2022, compared to a working capital of $11.0 million at December 31, 2021.

The decrease in the working capital

as of September 30, 2022 is primarily attributable to the repayment of convertible notes payable of $3.5 million in the current period.

December 27, 2021, the Company sold an aggregate of 2,585,000 units at a price to the public of $5.50 per unit (the “Offering”),

each unit consisting of one share of the Company’s common stock, par value $0.001 per share (the “Common Stock”), and

a warrant to purchase one share of Common Stock at an exercise price of $5.50 per share (the “Warrants”), pursuant to that

certain Underwriting Agreement, dated as of December 21, 2021 (the “Underwriting Agreement”), between the Company and Maxim

Group LLC (the “Underwriter”).

In addition, pursuant to the Underwriting Agreement, the Company granted the Underwriter a

45-day option to purchase up to 387,750 additional shares of Common Stock, and/or 387,750 additional Warrants, to cover over-allotments

in connection with the Offering, which the Underwriter partially exercised to purchase 387,750 Warrants on December 27, 2021.

27, 2021, the Company received gross proceeds of approximately $14.2 million, before deducting underwriting discounts and commissions

of seven percent (7%) of the gross proceeds and estimated Offering expenses.

to the Underwriting Agreement, the Company also agreed to issue to the Underwriter warrants (the “Underwriter’s Warrants”)

to purchase up to a total of 155,100 shares of Common Stock (6% of the shares of Common Stock sold in the Offering).

The Underwriter’s

Warrants are exercisable at $6.1875 per share of Common Stock and have a term of five years.

The Underwriter’s Warrants are subject

to a lock-up for 180 days from the commencement of sales in the Offering, including a mandatory lock-up period in accordance with FINRA

Rule 5110(e), and will be non-exercisable for six (6) months after December 21, 2021.

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 $1.8 million, including $194 thousand (which represents

the twelve months of guaranteed interest which was earned in full as of September 2, 2021), which is convertible into shares of the

Company’s common stock at a price per share of $5.25 subject to certain adjustments as discussed herein in Note 13 in the

Notes to Condensed Consolidated Financials.

The net proceeds received by the Company were $1.5 million after deducting fees and

expenses related to the transaction.

The purchasers in the September 2021 securities purchase agreement also received warrants to

purchase shares of our common stock.

On January 25, 2022, the Company repaid an investor in full with a one-time cash payment of

$300 thousand of outstanding principal and accrued but unpaid interest the September 2 Offering.

The Company did incur a 105%

pre-payment penalty of $16,800 with respect to the repayment of the investor’s note and the repayment extinguished the note in

its entirety.

Furthermore, the remaining September 2 Notes’ were fully repaid (including all principal and

interest) on September 6, 2022 with a one-time cash payment of $1.5 million.

March 11, 2021, the Company and Auctus entered into a senior secured convertible promissory note in the principal amount of $1,680

thousand, which includes $180 thousand of interest which was deemed fully earned as of the issuance date.

The Auctus Note was fully

repaid (including all principal and interest) on March 15, 2022 with a one-time cash payment of $1,680 thousand.

at March 31, 2023, compared to a working capital of $6.6 million at December 31, 2022.

The decrease in the working capital as

of March 31, 2023 is primarily attributable to the loss from operations of $883 thousand.

have never declared or paid any cash dividends on our common stock.

For the foreseeable future, we anticipate that all available funds

For the foreseeable future, we anticipate that all available fund

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

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value creation.

believe we have sufficient cash and marketable securities to operate our business plan through 2024.

We intend to maintain and attempt

to grow our existing contract manufacturing business.

We also plan to continue building and developing our catalog of consumer products

for sale to branding partners and to 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 marketplaces.

Furthermore, the Company plans to develop

its own proprietary medical devices and explore drug delivery programs for its technology.

Additionally, the Company continues to evaluate

strategic initiatives (e.g., acquisitions) and additional capital raises through debt or equity may be necessary to achieve these objectives.

have sufficient capital to maintain as a going concern due to the capital raise that occurred on December 27, 2021.

We intend to maintain

and attempt to grow our existing contract manufacturing business.

We also plan to continue building and developing its catalog of consumer

products for sale to branding partners and to use our in-house capabilities to create and test market additional branded products.

products will be target marketed and sold online through social media, television and online marketplaces.

Furthermore, the Company plans

to develop its own proprietary medical devices and explore drug delivery programs for its technology.

Additionally, the Company continues

to evaluate strategic initiatives (e.g., acquisitions) and additional capital raises through debt or equity may be necessary to achieve

these objectives.

expect to continue incurring losses for the near-term future.

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is dependent upon our ability to manage and grow our current products and to ultimately achieve profitable operations.

may consider various options to raise capital to fund potential acquisitions through equity or debt offerings.

There can be no

assurances, however, that management will be able to obtain sufficient additional funds, if needed, or that such funds, if

available, will be obtained on terms satisfactory to us.

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.

Management may

consider various options to raise capital to fund potential acquisitions through equity or debt offerings.

There can be no assurances,

however, that management will be able to obtain sufficient additional funds, if needed, or that such funds, if available, will be obtained

on terms satisfactory to us.

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.

Additionally,

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Balance Sheet Arrangements

of September 30, 2022, 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

of March 31, 2023, 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,

13 unchanged sentences

term as the sum of the award’s vesting term plus the original contractual term divided by two.

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.

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.

Liability – Warrants to purchase common stock were issued in connection with equity financing raises which occurred during

2019 through 2021.

The fair values of the warrants are estimated as of the date of issuance and again at each year 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.

term of the awards granted are based on either the three-year or five-year contractual expiration date.

Scholes Inputs - The fair value of each stock option award and warrant issued was estimated on the date of grant using a Black-Scholes

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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