NEXGEL, INC. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The 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. The 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. The 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 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; 24 Table of Contents ● 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. 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 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 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. Joint Venture On 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 1, 2023. As a result of this transaction, the Company owns 50% of the JV, with the remaining 50% held by CG Labs. Results of Operations 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 March 31, 2023 and 2022 Revenues, net . For 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. 25 Table of Contents The Company has four distinct lines of business; Contract Manufacturing, Custom & White Label, Consumer Branded Products, and Medical Devices. Contract Manufacturing Customers 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. Custom & White Label These products often infuse various ingredients into our base gel to develop unique product offerings to satisfy market demand (e.g. aloe infused 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. Consumer Branded Products These products are finished goods marketed and sold directly to the customer by the Company through online and retail channels. The Company is responsible for sales, marketing, and distribution. These products carry the Company’s brand names. Medical Devices Medical 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. Gross profit (loss) . 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 $35 thousand in gross loss quarter over quarter was primarily due to the higher volume of contract manufacturing sales against fixed costs partially offset by higher manufacturing labor costs. Gross loss was approximately (9.2%) for the three months ended March 31, 2023 compared to a gross loss of (5.6%) for the three months ended March 31, 2022. The components of cost of revenues are as follows for the three months ended March 31, 2023 and 2022 ($ in thousands): Three Months Ended March 31, 2023 2022 Cost of revenues Materials and finished products $ 355 $ 94 Compensation and benefits 171 171 Depreciation and amortization 20 21 Equipment, production and other expenses 131 132 Total cost of revenues $ 677 $ 418 Cost of revenues increased by $259 thousand, or 62.0%, to $677 thousand for the three months ended March 31, 2023, as compared to $418 thousand for the three months ended March 31, 2022. The increase in cost of revenues is primarily aligned with the new product line growth and an increase in compensation and benefits in the current year. 26 Table of Contents Selling, general and administrative expenses . The following table highlights Selling, general and administrative expenses by type for the three months ended March 31, 2023 and 2022 ($ in thousands): Three Months Ended March 31, 2023 2022 Selling, general and administrative expenses Compensation and benefits $ 161 $ 112 Share-based compensation 19 18 Depreciation and amortization 10 7 Advertising, marketing, & Amazon fees 94 39 Investor & shareholder services 96 149 Franchise tax & corporate insurance 44 49 Professional & consulting fees 263 226 Other expenses and professional fees 110 166 Total Selling, general and administrative expenses $ 797 $ 766 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 below. 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. The number of employees decreased compared to the prior period and officer compensation increased in conjunction with contract renewals. Share-based 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. Advertising, 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. Investor 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. Franchise 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. Professional 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. Other 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. Research and development expenses . Research and development expenses were $29 thousand and $24 thousand for the three months ended March 31, 2023 and March 31, 2022, respectively. 27 Table of Contents Liquidity and Capital Resources Cash Flow (in thousands) March 31, March 31, 2023 2022 Net cash used in operating activities $ (709) $ (797) Net cash provided by investing activities 397 — Net cash used in financing activities (2 ) (2,033) Net increase (decrease) in cash and cash equivalents (314) (2,830) Cash and cash equivalents at beginning of year 1,101 13,350 Cash and cash equivalent at end of quarter $ 787 $ 10,520 As 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, 2022. Net cash used in operating activities was $709 thousand and $797 thousand for the three months ended March 31, 2023 and 2022, respectively. Net 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, 2022. Net 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. At 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 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. We have never declared or paid any cash dividends on our common stock. 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 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. 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. We 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. 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. 28 Table of Contents We expect to continue incurring losses for the near-term future. Our ability to continue to operate as a going concern in the long-term is dependent upon our ability to manage and grow our current products and to ultimately achieve profitable operations. 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, 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 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, 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 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. The expected term of the awards granted are based on either the three-year or five-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. 29 Table of Contents ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required.