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; ● adverse federal, state and local government regulation; ● technological obsolescence of our manufacturing process and equipment; 24 Table of Contents ● 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 JV 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 condensed consolidated statements of operations for the comparison periods identified. Comparison of the Three Months ended September 30, 2023, and 2022 ($ in thousands) Revenues, net . For the three months ended September 30, 2023, revenues were $1,221 and increased by $653, or 115.0%, when compared to $568 for the three months ended September 30, 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 JV from March 1, 2023 through September 30, 2023 of $1,375. 25 Table of Contents The Company has four distinct lines of business; Contract Manufacturing, Custom & White Label, Consumer Branded Products, and Medical Devices as further described in Footnote #3. Gross profit (loss) . Our gross profit was $344 for the three months ended September 30, 2023, compared to a gross profit of $148 for the three months ended September 30, 2022. The increase of $196 in gross profit was primarily due to the higher volume of contract manufacturing sales against fixed costs partially offset by increased manufacturing. Gross profit was approximately 28.2% for the three months ended September 30, 2023, compared to a gross profit of 26.1% for the three months ended September 30, 2022. The components of cost of revenues are as follows for the three months ended September 30, 2023 and 2022 ($ in thousands): Three Months Ended September 30, 2023 2022 Cost of revenues Materials and finished products $ 593 $ 113 Compensation and benefits 51 176 Share-based compensation 11 - Depreciation and amortization 32 20 Equipment, production and other expenses 190 111 Total cost of revenues $ 877 $ 420 Cost of revenues increased by $457, or 108.8%, to $877 for the three months ended September 30, 2023, as compared to $420 for the three months ended September 30, 2022. The increase in cost of revenues pertains to an increase in materials and finished products and equipment, production, and other expenses. These increases primarily align with the growth in revenues. 26 Table of Contents Selling, general, and administrative expenses . The following table highlights selling, general, and administrative expenses by type for the three months ended September 30, 2023 and 2022 ($ in thousands): Three Months Ended September 30, 2023 2022 Selling, general and administrative expenses Compensation and benefits $ 169 $ 118 Share-based compensation 66 85 Depreciation and amortization 5 4 Advertising, marketing, & Amazon fees 178 103 Investor & shareholder services 86 71 Franchise tax & corporate insurance 52 264 Professional & consulting fees 271 213 Other expenses and professional fees 123 134 Total selling, general and administrative expenses $ 950 $ 992 Selling, general and administrative expenses decreased by $42, or 4.2%, to $950 for the three months ended September 30, 2023, as compared to $992 for the three months ended September 30, 2022. The decrease in Selling, general and administrative expenses is primarily attributable to the factors described below. Compensation and benefits increased by $51, or 43.2%, to $169 for the three months ended September 30, 2023, as compared to $118 for the three months ended September 30, 2022. The number of employees increased compared to the prior period and officer compensation increased in conjunction with contract renewals. Share-based compensation decreased by $19, or 22.4%, to $66 for the three months ended September 30, 2023, as compared to $85 for the three months ended September 30, 2022. The decrease in share-based compensation related to the issuance of stock options and restricted awards to our officers, employees, and advisors in the prior year period that compared to members of the Board of Directors in the current period. Advertising, marketing, & Amazon fees increased by $75, or 72.8% to $178 for the three months ended September 30, 2023, as compared to $103 for the three months ended September 30, 2022. The increase is due to the increased Amazon selling fees and Amazon Advertising, which correlates with our increase in Branded Sales. Investor and shareholder services increased by $15, or 21.1% to $86 for the three months ended September 30, 2023, as compared to $71 for the three months ended September 30, 2022. The increase is due to an increase in investor outreach. Franchise taxes and corporate insurance decreased by $212, or 80.3% to $52 for the three months ended September 30, 2023, as compared to $264 for the three months ended September 30, 2022. The vast majority of this decrease pertains to the Company’s reduction in authorized shares, which lowered its franchise tax expense. Professional and consulting fees increased by $58, or 27.2% to $271 for the three months ended September 30, 2023, as compared to $213 for the three months ended September 30, 2022. We continued to incur accounting and consulting fees associated with public company governance requirements. Other expenses decreased by $11, or 8.2%, to $123 for the three months ended September 30, 2023 from $134 for the three months ended September 30, 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. 27 Table of Contents Research and development expenses . Research and development expenses were $6 and $193 for the three months ended September 30, 2023 and September 30, 2022, respectively. The decrease is due to the completion of development efforts of two proof of concept studies for drug delivery candidates utilizing our hydrogel technology. Comparison of the Nine Months ended September 30, 2023 and 2022 ($ in thousands) Revenues, net . For the nine months ended September 30, 2023, revenues were $3,007 and increased by $1,483, or 97.3%, when compared to $1,524 for the nine months ended September 30, 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 our JV from March 1, 2023 through September 30, 2023 of $1,375. Gross profit . Our gross profit was $461 for the nine months ended September 30, 2023, compared to a gross profit of $220 for the nine months ended September 30, 2022. The increase in profit recorded for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, was primarily due to the higher volume of contract manufacturing sales against fixed costs, partially offset by increased manufacturing of promotional materials, customer product samples and other marketing materials to support our new product launches. Gross profit was approximately 15.3% for the nine months ended September 30, 2023, compared to a gross profit of 14.4% for the nine months ended September 30, 2022. The components of cost of revenues are as follows for the nine months ended September 30, 2023 and 2022 ($ in thousands): Nine Months Ended September 30, 2023 2022 Cost of revenues Materials and finished products $ 1,542 $ 403 Compensation and benefits 385 518 Share-based compensation 11 Depreciation and amortization 73 63 Equipment, production, and other expenses 535 320 Total cost of revenues $ 2,546 $ 1,304 Cost of revenues increased by $1,242, or 95.2%, to $2,546 for the nine months ended September 30, 2023, as compared to $1,304 for the nine months ended September 30, 2022. The increase in cost of revenues pertains to an increase in materials and finished products and equipment, production and other expenses. These increases primarily align with the increased revenues. Selling, general, and administrative expenses . The following table highlights selling, general, and administrative expenses by type for the nine months ended September 30, 2023 and 2022 ($ in thousands): Nine Months Ended September 30, 2023 2022 Selling, general, and administrative expenses Compensation and benefits $ 490 $ 379 Share-based compensation 109 219 Depreciation and amortization 32 11 Advertising, marketing, & Amazon fees 438 347 Investor & shareholder services 323 179 Franchise tax & corporate insurance 174 334 Professional & consulting fees 823 584 Other expenses 240 406 Total selling, general and administrative expenses $ 2,629 $ 2,459 Selling, general, and administrative expenses increased by $170, or 6.9%, to $2,629 for the nine months ended September 30, 2023, as compared to $2,459 for the nine months ended September 30, 2022. 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. 28 Table of Contents Compensation and benefits increased by $111, or 29.3%, to $490 for the nine months ended September 30, 2023, as compared to $379 for the nine months ended September 30, 2022. The number of employees increased compared to the prior period and officer compensation increased in conjunction with contract renewals. Share-based compensation decreased by $110, or 50.2%, to $109 for the nine months ended September 30, 2023, as compared to $219 for the nine months ended September 30, 2022. The decrease in share-based compensation year over year relates to the issuance of stock, restricted stock, and options to our CEO and options to board members in 2023 in comparison to companywide restricted stock awards issued to employees in 2022. Advertising, marketing, & Amazon fees increased by $91, or 26.2% to $438 for the nine months ended September 30, 2023, as compared to $347 for the nine months ended September 30, 2022. The corresponds to increased Amazon sales, partially offset by optimization of Amazon advertising spend in 2023. Investor and shareholder services increased by $144, or 80.4% to $323 for the nine months ended September 30, 2023, as compared to $179 for the nine months ended September 30, 2022. The increase is due to an increase in investor outreach. Franchise taxes and corporate insurance decreased by $160, or 47.9% to $174 for the nine months ended September 30, 2023, as compared to $334 for the nine months ended September 30, 2022. The vast majority of this decrease pertains to the Company’s reduction in authorized shares, which lowered its franchise tax expense. Professional and consulting fees increased by $239, or 40.9% to $823 for the nine months ended September 30, 2023, as compared to $584 for the nine months ended September 30, 2022. We continued to incur accounting and consulting fees associated with public company governance requirements. Other expenses decreased by $166, or 40.9%, to $240 for the nine months ended September 30, 2023 from $406 for the nine months ended September 30, 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 decreased by $238 to $90 for the nine months ended September 30, 2023 from $328 for the nine months ended September 30, 2022. The decrease is due to the completion of development efforts of two proof of concept studies for drug delivery candidates utilizing our hydrogel technology. Liquidity and Capital Resources Cash Flow (in thousands) September 30, September 30, 2023 2022 Net cash used in operating activities $ (2,649 ) $ (2,343 ) Net cash provided by (used in) investing activities 4,729 (6,068 ) Net cash provided by (used in) financing activities 85 (3,512 ) Net increase (decrease) in cash 2,165 (11,923 ) Cash at beginning of year 1,101 13,350 Cash at end of quarter $ 3,266 $ 1,427 29 Table of Contents As of September 30, 2023, we had $3.3 million of cash and $0 thousand 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 $2.6 million and $2.3 million for the nine months ended September 30, 2023 and 2022, respectively. Net cash provided by investing activities was $4.7 million and net cash used in investing activities was $6.1 million for the nine months ended September 30, 2023 and 2022, respectively, consisting of the sales of marketable securities of $5.3 million and purchases of capital equipment of $611 thousand for nine months ended September 30, 2023 and 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. Net cash provided by financing activities and cash used in financing activities for the nine months ended September 30, 2023 and 2022 was $85 thousand and $3.5 million, respectively, and is attributable to the proceeds from the margin line of credit of $89 thousand and principal payments of notes payable and convertible notes of $4 thousand for the nine months ended September 30, 2023 and attributable to principal payments of convertible notes of $3.5 million in the nine months ended September 30, 2022. At September 30, 2023, current assets totaled $5.9 million and current liabilities totaled $1.7 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 $4.2 million at September 30, 2023, compared to a working capital of $6.6 million at December 31, 2022. The decrease in the working capital as of September 30, 2023 is primarily attributable to the loss from operations of $2.3 million. 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. 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. 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. 30 Table of Contents Off Balance Sheet Arrangements As of September 30, 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. 31 Table of Contents ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required.