NEXGEL, INC. 10-K

Item 8. Financial Statements and Supplementary Data FINANCIAL STATEMENTS - TABLE OF CONTENTS For the Years Ended December 31, 2023 and 2022 Page(s) Report of Independent Registered Public Accounting Firm (PCAOB ID: 76 ) F-2 Consolidated Financial Statements: Consolidated Balance Sheets at December 31, 2023 and 2022 F-3 Consolidated Statements of Operations for the years ended December 31, 2023 and 2022 F-4 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2023 and 2022 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 F-6 Notes to Consolidated Financial Statements F-7 F- 1 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders of NexGel, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of NexGel, Inc. (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2023 and 2022, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Turner, Stone & Company, L.L.P . Dallas, Texas April 9, 2024 We have served as the Company’s auditor since 2019. F- 2 Table of Contents NEXGEL, INC CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) December 31, 2023 December 31, 2022 ASSETS: Current Assets: Cash $ 2,700 $ 1,101 Marketable securities - 5,508 Accounts receivable, net 633 222 Inventory 1,319 502 Prepaid expenses and other current assets 400 172 Total current assets 5,052 7,505 Goodwill 1,128 311 Intangibles, net 326 20 Property and equipment, net 1,499 721 Operating lease - right of use asset 1,855 1,737 Other assets 95 63 Total assets $ 9,955 $ 10,357 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable $ 1,233 $ 265 Accrued expenses and other current liabilities 398 130 Deferred revenue 20 - Current portion of note payable 80 15 Warrant liability 146 242 Contingent consideration liability 439 - Operating lease liability, current portion 233 207 Total current liabilities 2,549 859 Operating lease liability, net of current portion 1,727 1,593 Notes payable, net of current portion 513 268 Total liabilities 4,789 2,720 Commitments and Contingencies (Note 16) - - STOCKHOLDERS’ EQUITY Preferred stock, par value $ 0.001 per share, 5,000,000 shares authorized, no shares issued and outstanding - - Common stock, par value $ 0.001 per share, 25,000,000 shares authorized; 5,741,838 and 5,577,916 shares issued and outstanding as of December 31, 2023 and 2022, respectively 6 6 Additional paid-in capital 19,406 19,189 Accumulated deficit ( 14,715 ) ( 11,558 ) Total NexGel stockholders’ equity 4,697 7,637 Non-controlling interest in joint venture 469 - Total stockholders’ equity 5,166 7,637 Total liabilities and stockholders’ equity $ 9,955 $ 10,357 The accompanying notes are an integral part of these consolidated financial statements. F- 3 Table of Contents NEXGEL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) 2023 2022 Year Ended December 31, 2023 2022 Revenues, net $ 4,089 $ 2,048 Cost of revenues 3,470 1,792 Gross profit 619 256 Operating expenses Research and development 103 367 Selling, general and administrative 3,993 3,237 Total operating expenses 4,096 3,604 Loss from operations ( 3,477 ) ( 3,348 ) Other income (expense) Change in fair value of warrant liability, net of warrant modification expense 96 76 Realized gain on investments in marketable securities 191 9 Loss on debt extinguishment - ( 150 ) Interest expense, net ( 15 ) ( 1,336 ) Other expense ( 2 ) - Other income 19 3 Total other income (expense), net 289 ( 1,398 ) Loss before income taxes ( 3,188 ) ( 4,746 ) Income tax expense - - Net loss ( 3,188 ) ( 4,746 ) Less: Loss attributable to non-controlling interest in joint venture 31 - Net loss attributable to NexGel stockholders $ ( 3,157 ) $ ( 4,746 ) Net loss per common share – basic and diluted $ ( 0.56 ) $ ( 0.85 ) Weighted average shares used in computing net loss per common share – basic and diluted 5,671,842 5,574,818 The accompanying notes are an integral part of these consolidated financial statements. F- 4 Table of Contents NEXGEL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Years Ended December 31, 2023 and 2022 (in thousands, except share data) Shares Amount Capital Interest Deficit Equity Common Stock Additional Paid-in Non- controlling Accumulated Total Stockholders’ Shares Amount Capital Interest Deficit Equity Balance, December 31, 2021 5,572,234 $ 6 $ 18,891 $ - $ ( 6,812 ) $ 12,085 Stock-based compensation - - 231 - - 231 Restricted stock vesting 5,682 - 67 - - 67 Net loss - - - - ( 4,746 ) ( 4,746 ) Balance, December 31, 2022 5,577,916 $ 6 $ 19,189 $ - $ ( 11,558 ) $ 7,637 Common Stock Additional Paid-in Non- controlling Accumulated Total Stockholders’ Shares Amount Capital Interest Deficit Equity Balance, December 31, 2022 5,577,916 $ 6 $ 19,189 $ - $ ( 11,558 ) $ 7,637 Balance 5,577,916 $ 6 $ 19,189 $ - $ ( 11,558 ) $ 7,637 Stock-based compensation 3,295 - 217 - - 217 Restricted stock issuances 50,907 - - - - - Exercise of warrants 109,720 - - - - - Non-controlling interest contribution - - - 500 - 500 Net loss - - - ( 31 ) ( 3,157 ) ( 3,188 ) Balance, December 31, 2023 5,741,838 $ 6 $ 19,406 $ 469 $ ( 14,715 ) $ 5,166 Balance 5,741,838 $ 6 $ 19,406 $ 469 $ ( 14,715 ) $ 5,166 The accompanying notes are an integral part of these consolidated financial statements. F- 5 Table of Contents NEXGEL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) 2023 2022 Year Ended December 31, 2023 2022 Operating Activities Net loss $ ( 3,157 ) $ ( 4,746 ) Adjustments to reconcile net loss to net cash used in operating activities: Loss attributable to non-controlling interest in joint venture ( 31 ) - Depreciation and amortization 226 112 Share-based compensation 217 298 Realized gain on investment in marketable securities ( 191 ) ( 9 ) Change in fair value of warrant liability ( 125 ) ( 133 ) Amortization of right of use asset 217 189 Warrant modification expense 29 57 Loss of extinguishment of debt - 150 Amortization of deferred financing costs - 1,324 Changes in operating assets and liabilities: Accounts receivable, net ( 411 ) ( 13 ) Inventory ( 760 ) ( 211 ) Prepaid expenses and other current assets ( 260 ) ( 95 ) Accounts payable 968 11 Accrued expenses and other current liabilities 22 74 Deferred revenue 20 - Net Cash Used in Operating Activities ( 3,236 ) ( 2,992 ) Investing Activities Purchases of equipment ( 696 ) ( 96 ) Investment in subsidiary ( 547 ) - Proceeds from sales of marketable securities 5,699 1,500 Investments in or purchases of marketable securities - ( 6,999 ) Net Cash Provided by (Used in) Investing Activities 4,456 ( 5,595 ) Financing Activities Principal payments on operating lease liability ( 175 ) ( 151 ) Proceeds from notes payable 315 - Principal payments of notes payable ( 6 ) - Principal payments on convertible notes - ( 3,511 ) Proceeds from margin line of credit 245 - Net Cash Provided by (Used in) Financing Activities 379 ( 3,662 ) Net Increase (Decrease) in Cash 1,599 ( 12,249 ) Cash  – Beginning of year 1,101 13,350 Cash – End of year $ 2,700 $ 1,101 Supplemental Non-cash Investing and Financing Activities Property and equipment and intangibles contributed as capital investment to JV $ 500 $ - ROU asset and operating lease liabilities recognized upon consolidation of JV $ 334 $ - The accompanying notes are an integral part of these consolidated financial statements. F- 6 Table of Contents NEXGEL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 1. Description of Business, Stock Split and Basis of Presentation NexGel, Inc. (“NexGel” or the “Company”) manufactures high water content, electron beam cross-linked, aqueous polymer hydrogels, or gels, used for wound care, medical diagnostics, transdermal drug delivery and cosmetics. The Company specializes in custom gels by capitalizing on proprietary manufacturing technologies. The Company has historically served as a contract manufacturer, supplying our gels to third parties who incorporate them into their own products. Beginning in 2020, we created two new lines of business for the company. First, we launched our own line of branded consumer products sold direct to consumers. Second, we expanded into custom and white label opportunities, which focuses on combining our gels with proprietary branded products and white label opportunities. All of our gel 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. NexGel was previously known as AquaMed Technologies, Inc. (“AquaMed”) before changing its name to NexGel, Inc. on November 14, 2019. On March 1, 2023, the Company acquired a 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 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. Basis of Presentation The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and are presented in US dollars. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its consolidated wholly-owned subsidiary, NexGelRx, Inc. and the fifty percent ( 50 % ) owned JV (see Note 13). F- 7 Table of Contents 2. Going Concern As of December 31, 2023, the Company had a cash balance of $ 2.7 million. For the year ended December 31, 2023, the Company incurred a net loss of $ 3.2 million and had a net usage of cash in operating activities of $ 3.2 million. In addition, the Company had a working capital of $ 2.5 million as of December 31, 2023. Additionally, we believe we have sufficient cash and marketable securities to operate our business plan into 2025. On February 15, 2024, the Company, entered into subscription agreements with investors, the Company’s Chief Financial Officer and certain members of its board of directors for a registered direct offering (“RDO”) of the Company’s common stock. The RDO sold an aggregate 242,891 units at a price to the public of $ 4.22 per unit, with each unit consisting of two shares of the Company’s common stock, and a warrant to purchase one share of Common Stock at an exercise price of $ 4.00 per share. The $ 4.22 purchase price equals two times the last reported sale price of $2.11 per share of the Company’s Common Stock on February 15, 2024 on The Nasdaq Capital Market. The gross proceeds to the Company from the Offering are expected to be approximately $ 1.025 million, before deducting the placement agent’s fees and other estimated offering expenses payable by the Company, and excluding the proceeds, if any, from the exercise of the Warrants. The Company intends to use the net proceeds from the Offering for working capital and for general corporate purposes (See Note 20). Management is exploring new product channel sales in adjacent industries, such as cosmetics, athletic products, and proprietary medical devices. The Company has increased 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 recent capital raise. 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. 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 consolidated 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 consolidated 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. 3. Significant Accounting Policies and Estimates Use of Estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates and assumptions include allowances for doubtful accounts, inventory reserves, deferred taxes, share-based compensation and related valuation allowances and fair value of long-lived assets. Actual results could differ from the estimates. F- 8 Table of Contents Segment Reporting The Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 280, Segment Reporting , requires that an enterprise report selected information about reportable segments in its financial reports issued to its stockholders. The Company has two reportable segments - the Nexgel segment and the CG labs segment. The Nexgel segment is comprised of the manufacturing of ultra-gentle, high-water-content hydrogel products for healthcare and consumer applications, which is based in Langhorne, Pennsylvania. The CG labs segment is comprised of the JV used for the Company’s converting and packaging business, which is based in Granbury, Texas. Cash Cash is comprised of cash in banks and highly liquid investments, including U.S. treasury bills purchased with an original maturity of three months or less as well as investments in money market funds for which the carrying amount approximates fair value, due to the short maturities of these investments. Marketable Securities The Company classifies its marketable securities as held-to-maturity, which include U.S. treasury bills with original maturities of greater than three months. These securities are carried at fair value with any change in fair value recorded as an unrealized gain (loss) in the statement of operations of the year in which such change occurs. The Company had the following marketable securities as of December 31, 2023 and 2022 ($ in thousands): Schedule of Marketable Securities December 31, December 31, 2023 2022 Marketable Securities United States treasury bills (due February 23, 2023 ) $ - $ 492 United States treasury bills (due April 27, 2023 ) - 20 United States treasury bills (due June 15, 2023 ) - 4,384 United States treasury bills (due July 13, 2023 ) - 127 United States treasury bills (due August 10, 2023 ) - 485 Total $ - $ 5,508 Margin Line of Credit We have a brokerage account through which we buy and sell U.S. treasury bills. The provisions of the account allow us to borrow on certain securities held in the account and to purchase additional securities based on the account equity (including cash). Amounts borrowed are collateralized by the securities held in the account and bear interest at a negotiated rate payable monthly. Securities pledged to secure margin balances cannot be specifically identified as a portion of all securities held in a brokerage account are used as collateral. As of December 31, 2023, there was $ 245 thousand outstanding under this short-term credit line which is included in accrued expenses and other current liabilities within the accompanying consolidated balance sheet (see Note 10). The short-term credit line will be repaid upon the maturity of U.S. treasury bills of $ 3 million with an original maturity of three months or less which are included in cash within the accompanying consolidated balance sheet. F- 9 Table of Contents Accounts Receivable, net Trade accounts receivable are stated at the amount the Company expects to collect and do not bear interest. The Company evaluates the collectability of accounts receivable and records a provision to the allowance for doubtful accounts based on factors including the length of time the receivables are past due, the current business environment and the Company’s historical experience. Provisions to the allowances for doubtful accounts are recorded in selling, general and administrative expenses. Account balances are charged off against the allowance when it is probable that the receivable will not be recovered. The allowance for doubtful accounts was $ 11 thousand as of December 31, 2023 and $ 9 thousand as of December 31, 2022. Inventory and Cost of Revenues Inventory is stated at the lower of cost, the value determined by the first-in, first-out method, or net realizable value. The Company evaluates inventories for excess quantities, obsolescence, and shelf-life expiration. This evaluation includes an analysis of historical sales levels by product, projections of future demand, the risk of technological or competitive obsolescence for products, general market conditions, and a review of the shelf-life expiration dates for products. These factors determine when, and if, the Company adjusts the carrying value of inventory to estimated net realizable value. The Company produces proprietary branded products and white label opportunities in our manufacturing of consumer products. In our contract manufacturing, the Company builds its products based on customer orders and immediately ships the products upon completion of the production process. The balance is made up of raw materials, work-in-progress, and finished goods. Inventory is maintained at the Company’s warehouses and at fulfillment centers owned by Amazon, Walmart and CVS. The “Cost of revenues” line item in the consolidated statements of operations is comprised of the book value of inventory sold to customers during the reporting period. When circumstances dictate that we use net realizable value as the basis for recording inventory, we base our estimates on expected future selling prices less expected disposal costs. Research and Development Our research and development activities focus on new and innovative products designed to support revenue growth. Research and development expenses consist primarily of contracted development and testing efforts associated with development of products. Shipping and Handling Revenue and Expense Shipping and handling revenue and expense are included in our consolidated statements of operations in revenues and cost of revenues, respectively. Shipping revenue and expense are primarily generated through the Amazon marketplace. Property and Equipment, net Property and equipment is recorded at historical cost, net of accumulated depreciation and amortization. Depreciation is provided over the assets’ useful lives on a straight-line basis. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or lease terms. Repairs and maintenance costs are expensed as incurred. Management periodically assesses the estimated useful life over which assets are depreciated or amortized. If the analysis warrants a change in the estimated useful life of property and equipment, management will reduce the estimated useful life and depreciate or amortize the carrying value prospectively over the shorter remaining useful life. The carrying amounts of assets sold or retired and the related accumulated depreciation are eliminated in the year of disposal and any resulting gains and losses are included in the results of operations during the same year. F- 10 Table of Contents Impairment of Long-Lived Assets The Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Goodwill and Intangible Assets In applying the acquisition method of accounting, amounts assigned to identifiable assets and liabilities acquired were based on estimated fair values as of the date of acquisition, with the remainder recorded as goodwill. Identifiable intangible assets are initially recorded at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Identifiable intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. Intangible assets with indefinite lives are tested for impairment within one year of acquisitions or annually as of December 31, and whenever indicators of impairment exist. The fair value of intangible assets is compared with their carrying values, and an impairment loss would be recognized for the amount by which a carrying amount exceeds its fair value. The Company performed the annual assessment and concluded it is more likely than not that the fair value exceeds the carrying value and no impairments were recognized in the years ended December 31, 2023 and 2022. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets are recorded at historical cost and is primarily made up of $ 64 thousand and $ 63 thousand of prepaid insurance, and $ 336 thousand and $ 109 thousand general prepaid expenses and other current assets in the years ended December 31, 2023 and 2022 respectively. Other Assets Other Assets is recorded at historical costs, and as of December 31, 2023 and 2022, the balance is primarily comprised of spare parts for manufacturing equipment. Spare parts are not subject to depreciation until such time that they are placed into service and the part that is being replaced is disposed. Fair Value Measurements The Company utilizes the fair value hierarchy to apply fair value measurements. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair values that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. The basis for fair value measurements for each level within the hierarchy is described below: Level 1 —Quoted prices for identical assets or liabilities in active markets. Level 2 —Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or model-derived valuations whose inputs are observable or whose significant value drivers are observable. Level 3 —Valuations derived from valuation techniques in which one or more significant inputs to the valuation model are unobservable. F- 11 Table of Contents The Company considers the carrying amounts of its financial instruments (cash, accounts receivable and accounts payable, notes payable and convertible notes payable) in the balance sheet to approximate fair value because of the short-term or highly liquid nature of these financial instruments. The following table sets forth the fair value of the Company’s financial assets within the fair value hierarchy ($ in thousands): Schedule of Fair Value of Financial Assets Level 1 Level 2 Level 3 Fair Value December 31, 2023 Level 1 Level 2 Level 3 Fair Value Assets Marketable securities: United States treasury bills $ - $ - $ - $ - Total $ - $ - $ - $ - Level 1 Level 2 Level 3 Fair Value December 31, 2022 Level 1 Level 2 Level 3 Fair Value Assets Marketable securities: United States treasury bills $ 5,508 $ - $ - $ 5,508 Total $ 5,508 $ - $ - $ 5,508 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 values of the warrant are 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. Revenue Recognition On January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The Company adopted ASC 606 for all applicable contracts using the modified retrospective method, which would have required a cumulative-effect adjustment, if any, as of the date of adoption. The Company currently recognizes revenue predominately from three types of revenue, contract manufacturing, custom and white label finished goods manufacturing and our branded products. Revenues from manufactured products are recognized at the point where the customer obtains control of the goods and the Company satisfies its performance obligation, which generally is at the time the customer receives the product. The Company’s customers consist of other life sciences companies and Amazon retail customers. Revenues are entirely concentrated in the United States. Payment terms vary by the type and location of customer and may differ by jurisdiction and customer but payment is generally required in a term ranging from 30 to 60 days from date of shipment. F- 12 Table of Contents Estimates for product returns, allowances and discounts are recorded as a reduction of revenue and are established at the time of sale. Returns are estimated through a comparison of historical return data and are determined for each product and adjusted for known or expected changes in the marketplace specific to each product, when appropriate. Historically, sales return provisions have not been material. Amounts accrued for sales allowances and discounts are based on estimates of amounts that are expected to be claimed on the related sales and are based on historical data. Payments for allowances and discounts have historically been immaterial. Disaggregated revenue by sales type ($ in thousands): Schedule of Disaggregated Revenue by Sales Type 2023 2022 Year Ended December 31, 2023 2022 Contract manufacturing $ 2,748 $ 1,033 Custom and white label finished goods manufacturing 15 34 Consumer branded products 1,242 815 Other 84 166 Total $ 4,089 $ 2,048 As of December 31, 2023 and 2022, the Company did not have any contract assets or contract liabilities from contracts with customers and there were no remaining performance obligations that the Company had not satisfied except for deferred revenue of $ 20 thousand at December 31, 2023 that the Company had not satisfied as of the end of the year. The Company had no remaining performance obligations as of December 31, 2022. 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 convert and package into finished goods. Historically, this has been the Company’s primary source of revenue. Custom and 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/Other 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. Share-based Compensation On August 28, 2019, the Company adopted the 2019 Long-Term Incentive Plan, as amended (the “2019 Plan”). See Note 12 below for further details regarding the 2019 Plan. F- 13 Table of Contents The 2019 Plan provides certain employees, contractors, and outside directors with share-based compensation in the form of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights and other awards. 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. Forfeitures are accounted for when they occur. Income Taxes Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities at the applicable tax rates. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates. Tax benefits are recognized from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by a tax authority and based upon the technical merits of the tax position. The tax benefit recognized in the consolidated financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized upon settlement. An unrecognized tax benefit, or a portion thereof, is presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. Leases ASC 842 requires recognition of leases on the consolidated balance sheets as right-of-use (“ROU”) assets and lease liabilities. ROU assets represent the Company’s right to use underlying assets for the lease terms and lease liabilities represent the Company’s obligation to make lease payments arising from the leases. Operating lease ROU assets and operating lease liabilities are recognized based on the present value and future minimum lease payments over the lease term at commencement date. As the Company’s leases do not provide an implicit rate, the Company used its estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. A number of the lease agreements contain options to renew and options to terminate the leases early. The lease term used to calculate ROU assets and lease liabilities only includes renewal and termination options that are deemed reasonably certain to be exercised. The Company recognized lease liabilities, with corresponding ROU assets, based on the present value of unpaid lease payments for existing operating leases longer than twelve months. The ROU assets were adjusted per ASC 842 transition guidance for existing lease-related balances of accrued and prepaid rent, and unamortized lease incentives provided by lessors. Operating lease cost is recognized as a single lease cost on a straight-line basis over the lease term and is recorded in selling, general and administrative expenses. Variable lease payments for common area maintenance, property taxes and other operating expenses are recognized as expense in the year when the changes in facts and circumstances on which the variable lease payments are based occur. The Company has elected not to separate lease and non-lease components for all property leases for the purposes of calculating ROU assets and lease liabilities. Variable Interest Entity The Company reviews each legal entity formed by parties related to the Company to determine whether or not the Company has a variable interest in the entity and whether or not the entity would meet the definition of a variable interest entity (“VIE”) in accordance with ASC Topic 810, Consolidation . In assessing whether the Company has a variable interest in the entity as a whole, the Company considers and makes judgements regarding the purpose and design of the entity, the value of the licensed assets to the entity, the value of the entity’s total assets and the significant activities of the entity. If the Company has a variable interest in the entity as a whole, the Company assesses whether or not the Company is a primary beneficiary of that VIE, based on a number of factors, including: (i) which party has the power to direct the activities that most significantly affect the VIE’s economic performance, (ii) the parties’ contractual rights and responsibilities pursuant to the collaboration agreement, and (iii) which party has the obligation to absorb losses of or the right to receive benefits from the VIE that could be significant to the VIE. If the Company determines that it is the primary beneficiary of a VIE at the onset of the collaboration, the collaboration is treated as a business combination and the Company consolidates the financial statements of the VIE into the Company’s consolidated financial statements. As of December 31, 2023, and on a quarterly basis thereafter, the Company will evaluate whether it continues to be the primary beneficiary of the consolidated VIE. If the Company determines that it is no longer the primary beneficiary of a consolidated VIE, it deconsolidates the VIE in the period in which the determination is made. Assets and liabilities recorded as a result of consolidating the financial results of the VIE into the Company’s consolidated balance sheet do not represent additional assets that could be used to satisfy claims against the Company’s general assets or liabilities for which creditors have recourse to the Company’s general assets. F- 14 Table of Contents Comprehensive loss Comprehensive loss consists of net loss and changes in equity during a year from transactions and other equity and circumstances generated from non-owner sources. The Company’s net loss equals comprehensive loss for all years presented. Recently Issued Accounting Standards From time to time, new accounting pronouncements are issued by the FASB, or other standard setting bodies and adopted by us as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial position or results of operations upon adoption. In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . ASU 2016-13 significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU 2016-13 is effective for the Company’s fiscal year beginning January 1, 2023 and subsequent interim periods. The Company adopted this new standard in the current year and it did not have a material impact to its consolidated financial statements. Accounting Pronouncements Issued But Not Yet Adopted In December 2023, the FASB issued ASU 2023-09 , Income Taxes (Topic 740): Improvements to Income Tax Disclosures . The ASU requires that an entity disclose specific categories in the effective tax rate reconciliation as well as reconciling items that meet a quantitative threshold. Further, the ASU requires additional disclosures on income tax expense and taxes paid, net of refunds received, by jurisdiction. The new standard is effective for annual periods beginning after December 15, 2024 on a prospective basis with the option to apply it retrospectively. Early adoption is permitted. The adoption of this guidance will result in the Company being required to include enhanced income tax related disclosures. The Company is currently evaluating the impact this standard will have on its consolidated financial statements. In November 2023, the FASB issued ASU 2023-07 , Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures . This ASU includes amendments that expand the existing reportable segment disclosure requirements and requires disclosure of (i) significant expense categories and amounts by reportable segment as well as the segment’s profit or loss measure(s) that are regularly provided to the chief operating decision maker (the “CODM”) to allocate resources and assess performance; (ii) how the CODM uses each reported segment profit or loss measure to allocate resources and assess performance; (iii) the nature of other segment balances contributing to reported segment profit or loss that are not captured within segment revenues or expenses; and (iv) the title and position of the individual or name of the group or committee identified as the CODM. This guidance requires retrospective application to all prior periods presented in the financial statements and is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The adoption of this guidance will result in the Company being required to include enhanced disclosures relating to its reportable segments. The Company is currently evaluating the impact this standard will have on its consolidated financial statements. F- 15 Table of Contents 4. Business Segments The Company’s Chief Executive Officer, who serves as the chief operating decision maker (“CODM”), evaluates the financial performance of the Company’s segments based upon segment adjusted operating income or (loss) as the profitability measure. Items outside of adjusted operating income or (loss) are not reported by segment, since they are excluded from the single measure of segment profitability reviewed by the CODM. Summarized financial information concerning the Company’s reportable segments for the years ended December 31, 2023 and 2022 is presented below. Schedule of Reportable Segments For Year Ended December 31, 2023 ($ in thousands) Nexgel CG Labs Total Revenue Contract Manufacturing $ 769 $ 1,979 $ 2,748 Custom and White Label Finished Goods 15 - 15 Branded Consumer Products 1,242 - 1,242 Other income 76 8 84 Total revenue 2,102 1,987 4,089 Cost of sales 1,911 1,559 3,470 Operating expenses 3,604 492 4,096 Loss from operations $ ( 3,413 ) $ ( 64 ) $ ( 3,477 ) For Year Ended December 31, 2022 ($ in thousands) Nexgel CG Labs Total Revenue Contract Manufacturing $ 1,033 $ - $ 1,033 Custom and White Label Finished Goods 34 - 34 Branded Consumer Products 815 - 815 Other income 166 - 166 Total revenue 2,048 - 2,048 Cost of sales 1,792 - 1,792 Operating expenses 3,604 - 3,604 Loss from operations $ ( 3,348 ) $ - $ ( 3,348 ) As of December 31, 2023 ($ in thousands) Nexgel CG Labs Total Assets: Current assets: Cash $ 2,458 $ 242 $ 2,700 Accounts receivable, net 26 607 633 Inventory 622 697 1,319 Prepaid expenses and other current assets 312 88 400 Total current assets 3,418 1,634 5,052 Goodwill 1,128 - 1,128 Intangibles 122 204 326 Property and equipment, net 898 601 1,499 Operating lease – right of use asset 1,543 312 1,855 Other assets 95 - 95 Total Assets $ 7,204 $ 2,751 $ 9,955 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 509 $ 724 $ 1,233 Accrued expenses and other current liabilities 137 261 398 Deferred revenue 20 - 20 Current portion of note payable 6 74 80 Warrant liability 146 - 146 Contingent consideration liability 439 - 439 Operating lease liability, current portion 207 26 233 Total current liabilities 1,464 1,085 2,549 Operating lease liability, net of current portion 1,438 289 1,727 Notes payable, net of current portion 272 241 513 Total liabilities $ 3,174 $ 1,615 $ 4,789 5. Acquisition Kenkoderm Acquisition On December 1, 2023, the Company closed a transaction related to an Asset Purchase Agreement dated November 30, 2023 (the “Purchase Agreement”) with Olympus Trading Company, LLC, a Virginia limited liability company (the “Seller”), whereby the Company purchased all assets related to the Seller’s skincare line focused on reducing symptoms associated with psoriasis operating under the tradename “Kenkoderm” (“Kenkoderm acquisition”). Under the terms of the Kenkoderm acquisition, the Company paid the Seller a cash payment of $ 546,500 . Additionally, the Company shall pay the Seller a cash earn-out of the same amount each quarter, payable in the subsequent month flowing quarter end, of $ 136,625 . The cash earn-out can fluctuate higher or lower based on the quarterly results of the Kenkoderm business during 2024 according to the formula contained in the Purchase Agreement. The Purchase Agreement and the transaction contemplated thereby were not subject to approval by the shareholders of the Company. The Purchase Agreement contains standard representations and warranties regarding the Seller and the Kenkoderm business and certain limited representations and warranties regarding the Company. The Purchase Agreement also contains indemnification provisions for the benefit of the Company and the Seller. Neither the Company nor the Seller shall be liable for more than the Purchase Price under the indemnification provisions except in the case of fraud or willful misconduct. The Seller and the Seller’s President and owner agreed to 3-year non-compete provisions as part of the Purchase Agreement. F- 16 Table of Contents The provisional fair value of the purchase consideration issued to the Seller was allocated to the net tangible assets acquired. The Company accounted for the Kenkoderm acquisition as the purchase of a business under GAAP under the acquisition method of accounting, and the assets and liabilities acquired were recorded as of the acquisition date, at their respective fair values and consolidated with those of the Company. The fair value of the net assets acquired was approximately $ 169 thousand. The excess of the aggregate fair value of the net tangible assets has been allocated to goodwill. The table below shows a preliminary analysis for the Kenkoderm acquisition ($ in thousands): Schedule of Business Acquisitions Provisional purchase consideration at preliminary fair value: Purchase price $ 547 Contingent consideration liability 439 Amount of consideration $ 986 Assets acquired and liabilities assumed at preliminary fair value Inventory 56 Product/technology related intangibles 77 Marketing related intangibles 36 Other liabilities - Net tangible assets acquired $ 169 Total net assets acquired $ 169 Consideration paid 986 Preliminary goodwill $ 817 Non-controlling Interest in Joint Venture – CG Labs On March 1, 2023, the Company acquired a 50 % interest in the JV (see Note 1). The JV is owned 50 % by the Company and 50 % by CG Labs. CG Labs contributed its existing converting and packaging division to the JV, including, but not limited to, its facilities, equipment, employees, and customers. The Company will contribute $ 500,000 to the JV, on a schedule to be determined, to be used for equipment and facility upgrades as well as general corporate purposes for the JV. As of December 31, 2023, the Company has contributed its full $ 500,000 commitment. The JV is considered to be a VIE and we have consolidated the JV. F- 17 Table of Contents The recorded assets acquired and liabilities assumed in connection with the formation of CG Labs based on their estimated fair values as of the March 1, 2023. The preliminary purchase price allocation is as follow ($ in thousands): Schedule of Business Acquisitions Provisional purchase consideration at preliminary fair value: Cash contributed by the Company $ 500 Noncontrolling interest portion of CG Labs contributed business 500 Amount of consideration $ 1,000 Assets acquired and liabilities assumed at preliminary fair value Cash contributed by the Company 500 Fixed assets 213 Product/technology related intangibles 217 Marketing related intangibles 70 Net tangible assets acquired $ 1,000 Total net assets acquired $ 1,000 Consideration paid 1,000 Preliminary goodwill $ - The allocation of the purchase price to identifiable assets is based on the preliminary valuations performed to determine the fair value of the net assets as of the acquisition date. The measurement period for the valuation of net assets acquired ends as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but not to exceed 12 months following the acquisition date. Adjustments in purchase price allocations may require a change in the amounts allocated to net assets acquired during the periods in which the adjustments are determined. The unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations are not intended to present actual results that would have been attained had the Kenkoderm acquisition and CG Labs JV been completed as of January 1, 2022 or to project potential operating results as of any future date or for any future periods ($ in thousands except share and per share amounts): Schedule of Unaudited Pro-Forma Results of Operations 2023 2022 For the Year Ended December 31, 2023 2022 Revenues, net $ 5,522 $ 4,014 Net loss allocable to common shareholders $ ( 3,071 ) $ ( 4,634 ) Net loss per share $ ( 0.54 ) $ ( 0.83 ) Weighted average number of shares outstanding 5,671,842 5,574,818 F- 18 Table of Contents 6. Leases The Company has an operating lease for a commercial manufacturing facility and administrative offices located in Langhorne, Pennsylvania that runs through January 2031. There are two options that can extend the lease term for five years each. The exercise of the lease options to renew is solely at the Company’s discretion. The Company also has a sublease for office and manufacturing space in Granbury, Texas that runs through February 2028.There is an option that can extend the lease term for an additional five years through February 2033. The exercise of the lease options to renew is solely at the Company’s discretion. The following table presents information about the amount and timing of the liability arising from the Company’s operating lease as of December 31, 2023 ($ in thousands): Schedule of Future Minimum Lease Payments Maturity of Lease Liability Operating Lease Liability 2024 $ 245 2025 245 2026 301 2027 315 2028 324 Thereafter 790 Total undiscounted operating lease payments $ 2,220 Less: Imputed interest ( 260 ) Present value of operating lease liability $ 1,960 Weighted average remaining lease term 7.4 years Weighted average discount rate 3.0 % Total operating lease expense for the years ended December 31, 2023, and 2022, was $ 303 thousand and $ 246 thousand, respectively, and is recorded in cost of goods sold and selling, general, and administrative expenses in the accompanying consolidated statements of operations. Supplemental cash flows information related to leases was as follows: Schedule of Supplemental Cash Flows Information Related to Leases December 31, 2023 Cash paid for amounts included in the measurement of lease liability ($ in thousands): Operating cash flows from operating lease $ 238 7. Inventory Inventory consists of the following ($ in thousands): Schedule of Inventory December 31, December 31, 2023 2022 Raw materials $ 899 $ 295 Work-in-progress 12 51 Finished goods 408 156 Inventory, gross 1,319 502 Less: Inventory reserve for excess and slow moving inventory - - Total $ 1,319 $ 502 Inventory is maintained at the Company’s warehouses and at fulfillment centers owned by Amazon, Walmart and CVS. The Company builds its contract manufacturing products based on customer orders and immediately ships the products upon completion of the production process. 8. Property and Equipment, Net Property and equipment consist of the following ($ in thousands): Schedule of Property and Equipment Useful Life December 31, December 31, (Years) 2023 2022 Machinery and equipment 3 - 10 $ 1,280 $ 973 Office furniture and equipment 3 - 10 139 59 Leasehold improvements 6 419 228 Construction in progress N/A 387 55 Total property and equipment 2,225 1,315 Less: accumulated depreciation and amortization ( 726 ) ( 594 ) Property and equipment, net $ 1,499 $ 721 Depreciation expense for the year ended December 31, 2023 and 2022 was $ 132 thousand and $ 99 thousand, respectively. F- 19 Table of Contents 9. Intangible Assets The following provides a breakdown of identifiable intangible assets as of December 31, 2023 and 2022 ($ in thousands): Schedule of Breakdown of Identifiable Intangible Assets December 31, December 31, 2023 2022 Product/Technology Related Identifiable intangible assets, gross $ 325 $ 31 Accumulated amortization ( 98 ) ( 26 ) Product/technology related identifiable intangible assets, net 227 5 Marketing Related Customer related intangible asset, gross 17 17 Tradename related intangible asset, gross 113 7 Accumulated amortization ( 31 ) ( 9 ) Marketing related identifiable intangible assets, net 99 15 Total identifiable intangible assets, net $ 326 $ 20 In connection with the May 29, 2020 acquisition of Sports Defense, the Company identified intangible assets of $ 55 thousand representing technology related and customer related intangibles. In connection with the March 1, 2023 CG Labs JV, the Company identified intangible assets of $ 287 thousand representing technology related and customer related intangibles. In connection with the December 1, 2023 acquisition of Kenkoderm, the Company identified intangible assets of $ 113 thousand representing technology related and customer related intangibles. These assets are being amortized on a straight-line basis over their weighted average estimated useful life of 2.9 years and amortization expense amounted to $ 94 and $ 13 thousand for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, the estimated annual amortization expense for each of the next five fiscal years is as follows ($ in thousands): Schedule of Estimated Annual Amortization Expense 2024 $ 119 2025 126 2026 63 2027 13 2028 2 Thereafter 3 Total $ 326 F- 20 Table of Contents 10. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following ($ in thousands): Schedule of Accrued Expenses and Other Current Liabilities December 31, December 31, 2023 2022 Salaries, benefits, and incentive compensation $ 61 $ 56 Franchise tax accrual - 52 Margin line of credit 245 - Other 92 22 Total accrued expenses and other current liabilities $ 398 $ 130 11. Common Stock At December 31, 2023, the Company has reserved common stock for issuance in relation to the following: Schedule of Reserved Common Stock For Issued Securities in Relation Share-based compensation plan 560,650 Warrants to purchase common stock 3,442,904 Restricted stock units 64,562 12. Share-based Compensation The 2019 Plan provides for the granting of incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights (“SARs”), restricted stock units, performance awards, dividend equivalent rights and other awards, which may be granted singly, in combination, or in tandem, and which may be paid in cash, shares of common stock of the Company or a combination of cash and shares of common stock of the Company. The Company initially reserved a total of 57,143 shares of the Company’s common stock for awards under the 2019 Plan. Effective as of May 26, 2020 and May 3, 2021, respectively, the Board approved an increase of the number of authorized shares of common stock reserved under the 2019 Plan from 57,143 shares of common stock to 485,715 and from 485,715 shares of common stock to 571,429 shares of common stock, all of which may be delivered pursuant to incentive stock options. On March 23, 2023, the Board approved an additional 300,000 shares of common stock to be reserved under the 2019 Plan, such that total of number of shares underlying the Plan is 871,429 of which 609,687 shares have already been awarded or exercised. Subject to adjustments pursuant to the 2019 Plan, the maximum number of shares of common stock with respect to which stock options or SARs may be granted to an executive officer during any calendar year is 14,286 shares of common stock. The following table contains information about the 2019 Plan as of December 31, 2023: Schedule of Information about Incentive Plan Awards Awards Reserved for Awards Awards Available for Issuance Issued Exercised Grant 2019 Plan (1) 871,429 649,833 17,916 221,596 Awards issued in excess of 2019 Plan (2) - 48,401 48,401 - (1) Includes incentive stock options and restricted stock units discussed below. (2) Includes shares of restricted common stock granted outside of the 2019 Plan to our Chief Executive Officer, Adam Levy. F- 21 Table of Contents Incentive stock options On March 8, 2023, the Company granted a contractor an option to purchase up to 17,532 shares of the Company’s common stock at a per share exercise price of $ 2.00 under the Company’s 2019 Plan. This option award vests over a period of 12 months. The options expired unexercised. On August 17, 2023, the Company granted options to purchase up to 90,000 shares of the Company’s common stock at a per share exercise price of $ 2.05 to members of the Board of Directors, all of which vests over a period of one year with 25 % vested upon issuance. On October 1, 2022, the Company appointed Dr. Neil Chesen to the Company’s Scientific Advisory Board and in consideration for his appointment to the board, the Company granted Dr. Chesen an option to purchase up to 65,000 shares of common stock at a per share exercise price of $ 2.00 under the Company’s 2019 Long-Term Incentive Plan. A portion of the award, 15,000 options, fully vested as of the date of grant and the remaining 50,000 options are contingent upon certain sales based milestones being achieved. The options expire on December 31, 2023 if the milestones are not achieved prior to that date. Also on October 1, 2022, the Company issued a second option grant to Dr. Chesen, to purchase up to 25,000 shares of common stock at a per share exercise price of $ 2.00 under the Company’s 2019 Long-Term Incentive Plan and are fully contingent upon certain sales based milestones being achieved with 18 months of commercial release. Also on October 1, 2022, the Company issued a third option grant to Dr. Chesen to purchase up to 37,500 shares of common stock at a per share exercise price of $ 5.50 under the Company’s 2019 Long-Term Incentive Plan and are fully contingent upon certain sales based milestones being achieved within 36 months of commercial release. As of December 31, 2022 the new product has not launched. The product launched in August 2023. On October 1, 2022, the Company granted Dr. Leonard Nelson an option to purchase up to 30,000 shares of the Company’s common stock at a per share price of $ 2.00 under the Company’s 2019 Long-Term Incentive Plan. A portion of the award, 5,000 options, fully vested as of the date of the grant and the remaining 25,000 options are contingent upon certain sales based milestones being achieved. The options expire within 18 months of commercial launch of a new product if the milestones are not achieved prior to that date or 10 years from the grant date, whichever comes first. The product launched in August 2023. On October 1, 2022, the Company granted Dr. Leonard Nelson an option to purchase up to 37,500 shares of the Company’s common stock at a per share price of $ 5.50 under the Company’s 2019 Long-Term Incentive Plan. The options are contingent upon certain sales based milestones being achieved. The options expire within 36 months of commercial launch of a new product if the milestones are not achieved prior to that date or 10 years from the grant date, whichever comes first. The product launched in August 2023. The following table summarizes the Company’s incentive stock option activity and related information for the years ended December 31, 2023 and 2022. Schedule of Incentive Stock Option Activity Weighted Weighted Average Average Contractual Number of Exercise Term in Options Price Years Outstanding at January 1, 2022 434,939 $ 1.678955 8.56 Granted 195,000 3.3461538 10.00 Exercised — — — Forfeited — — — Cancelled ( 100,001 ) 1.40000 — Expired ( 5,001 ) 1.40000 — Outstanding at December 31, 2022 524,937 $ 2.351416 8.38 Granted 117,532 $ 2.06041 10.00 Exercised ( 3,295 ) 1.75 — Forfeited — — — Cancelled ( 69,854 ) 1.965823 — Expired ( 8,670 ) 1.703222 — Outstanding at December 31, 2023 560,650 $ 2.350742 7.95 Exercisable at December 31, 2023 398,150 $ 1.829884 7.44 F- 22 Table of Contents As of December 31, 2023 and 2022, vested outstanding stock options had $ 295 thousand and $ 124 thousand intrinsic value as the exercise price is greater than the estimated fair value of the underlying common stock, respectively. As of December 31, 2023, there was no unrecognized share-based compensation related to unvested stock options, excluding options fully contingent upon certain sales-based milestones being achieved within 18 to 36 months of commercial release. The Company recognizes compensation expense for stock option awards on a straight-line basis over the applicable service period of the award. The service period is generally the vesting period. The following assumptions were used to calculate share-based compensation expense for year ended December 31, 2023 and 2022: Schedule of Assumptions used in Share-based Compensation 2023 2022 Volatility 257.64 - 258.01 % 277.84 % Risk-free interest rate 4.21 - 4.42 % 4.06 % Dividend yield 0.0 % 0.0 % Expected term 5 - 5.50 years 5.0 years The Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior. Accordingly, the Company has elected to use the “simplified method” to estimate the expected term of its share-based awards. The simplified method computes the expected term as the sum of the award’s vesting term plus the original contractual term divided by two. 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. Restrictive stock awards Effective as of January 3, 2023, the Company granted a restricted stock award of 37,037 shares of the Company’s common stock to Adam Levy for his service as our Chief Executive Officer pursuant to the terms of his Executive Employment Agreement dated December 30, 2022, all of which shares vested monthly from January 3, 2023 through December 31, 2023. Under ASC 718, the Company has measured the value of the 37,037 shares granted based on the closing price of the Company’s stock at the grant date of the RSU Grant ($ 1.35 per share). Effective as of August 1, 2022, the Company granted a restricted stock award of 84,750 shares of the Company’s common stock to certain officers and employees, all of which shares vest in four equal installments on each of January 1, 2023, January 1, 2024, January 1, 2025 and January 1, 2026. Under ASC 718, the Company has measured the value of the 84,750 shares granted based on a closing price of the closing price of the Company’s stock at the grant date of the RSU Grant ($ 1.82 per share). Effective as of January 1, 2022, the Company granted a restricted stock award of 11,364 shares of the Company’s common stock to Adam Levy for his service as our Chief Executive Officer pursuant to the terms of his Executive Employment Agreement dated November 4, 2021, all of which shares vested monthly from January 1, 2022 through December 31, 2022. Under ASC 718, the Company has measured the value of the 11,364 shares granted based on the closing price of the Company’s stock at the grant date of the RSU Grant ($ 4.40 per share). Schedule of Restricted Stock Units Granted Average Number of Grant Date Units Fair Value Outstanding at December 31, 2021 — $ — Granted 96,114 1.61 Exercised and converted to common shares ( 5,682 ) 4.40 Forfeited — — Outstanding at December 31, 2022 90,432 1.43 Granted 37,037 1.35 Exercised and converted to common shares ( 50,157 ) 1.76522 Forfeited ( 12,750 ) 1.82 Outstanding at December 31, 2023 64,562 $ 1.82 Exercisable at December 31, 2023 13,750 $ 1.82 Compensation expense will be recognized ratably over the total vesting schedule. The Company will periodically adjust the cumulative compensation expense for forfeited awards. As of December 31, 2023, there was $ 68 thousand unrecognized share-based compensation related to unvested RSUs, which the Company expects to recognize through December 2026. Stock based compensation and restricted stock vesting of $ 217 thousand and $ 298 thousand has been recorded for the year ended December 31, 2023 and 2022, respectively. F- 23 Table of Contents Warrants The following table shows a summary of common stock warrants for the years ended December 31, 2023 and 2022. Schedule of Common Stock Warrants Weighted Weighted Average Average Number of Exercise Contractual Warrants Price Term in Years Outstanding at December 31, 2021 3,637,190 $ 5.16281 4.63 Granted — $ — — Exercised — — — Forfeited — — — Cancelled — — — Expired — — — Outstanding at December 31, 2022 3,637,190 $ 5.16281 3.65 Granted — — — Exercised ( 109,720 ) 0.55 — Forfeited — — — Cancelled ( 84,566 ) 0.89 — Expired — — — Outstanding at December 31, 2023 3,442,904 $ 5.414793 2.87 Exercisable at December 31, 2023 3,442,904 $ 5.414793 2.87 As of December 31, 2023 and 2022, vested outstanding warrants had $ 0 and $ 114 thousand, respectively, intrinsic value as the exercise price is greater than the estimated fair value of the underlying common stock. 13. Notes Payable CG Labs Notes Payable CG Labs has entered into a $ 231 thousand promissory note agreement for certain equipment. The equipment was installed in December 2023. The promissory note has a term of five years beginning on March 13, 2024. The promissory note accrues interest at 8 % and requires interest only payments through March 13, 2024 and monthly payments of $ 4 thousand thereafter. CG Labs has entered into a $ 242 thousand promissory note agreement for certain equipment. The funding advances of $ 84 thousand have been issued as of December 2023. The promissory note has a term of five years beginning on March 13, 2024. The promissory note accrues interest at 8 % and requires interest only payments through March 13, 2024 and monthly payments of $ 5 thousand thereafter. Economic Injury Disaster Loan On May 28, 2020, the Company entered into the standard loan documents required for securing a loan (the “EIDL Loan”) from the SBA under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business. Pursuant to that certain Loan Authorization and Agreement (the “SBA Loan Agreement”), the principal amount of the EIDL Loan is up to $ 260,500 , with proceeds to be used for working capital purposes. Interest accrues at the rate of 3.75 % per annum. Installment payments, including principal and interest, are due monthly beginning May 28, 2021 (twelve months from the date of the SBA Note) in the amount of $ 1,270 . The balance of principal and interest is payable thirty years from the date of the SBA Note. In connection therewith, the Company received an $ 8 thousand advance, which does not have to be repaid. On March 26, 2021, the SBA announced that all EIDL loans issued in 2020 will start repayment 24 months from the date of the SBA Note. The SBA has since extended the repayment start to 30 months from the date of the SBA Note. The Company made its first payment in December 2022. The balances of the principal and accrued interest amounted to $ 277 thousand and $ 283 thousand as of December 31, 2023 and 2022, respectively. F- 24 Table of Contents The future annual principal amounts and accrued interest to be paid as of December 31, 2023 are as follows: Schedule of Debt Instruments Amount For the year ending December 31 ($ in thousands): 2024 $ 80 2025 89 2026 51 2027 55 2028 59 Thereafter 259 Total $ 593 14. Convertible Notes Payable On March 11, 2021, the Company issued Auctus Fund, LLC, a Delaware limited liability company a one-year senior secured convertible promissory note in the principal amount of $ 1.68 million, which included $ 180 thousand of interest which was deemed fully earned as of the issuance date (the “Auctus Note”). The Auctus Note was fully repaid (including all principal and interest) on March 15, 2022 with a one-time cash payment of $ 1.68 million. On September 2, 2021, the Company issued to certain holders one-year subordinated secured convertible promissory notes in the aggregate principal amount of $ 1,814 thousand, which included $ 194 thousand of interest which was deemed fully earned as of the issuance date (the “September 2 Notes”). On January 25, 2022, the Company repaid one of the September 2 Notes in full with a one-time cash payment of $ 300 thousand of outstanding principal and accrued but unpaid interest. The Company incurred pre-payment penalty of $ 17 thousand with respect to the repayment of the note and the remaining unamortized debt discount in the amount of $ 133 thousand was written off and both amounts were recorded as a loss on extinguishment of debt of $ 150 thousand in accompany statement of operations during 2022. The repayment extinguished the note in its entirety. On September 6, 2022, the outstanding balance on the remaining September 2 Notes’ was repaid in full which consisted of principal of $ 1,478 thousand. 15.  Warrant Liability On September 2, 2021, March 11, 2021, February 3, 2021, December 24, 2020, March 18, 2020, September 10, 2019, and November 6, 2019, the Company issued 22,019 , 34,285 , 7,429 , 7,286 , 44,286 , 35,714 and 114,286 warrants, respectively, as equity issuance consideration, in connection with a private placement of the Company’s common stock. The warrants entitle the holder to purchase one share of our common stock at an exercise price equal to $ 0.49 to $ 5.25 per share at any time on or after their issuance date and on or prior to the close of business 3 years after the issuance date (the “Termination Date”). The Company determined that these warrants are free standing financial instruments that are legally detachable and separately exercisable from the common stock included in the public share offering. Management also determined that the warrants required classification as a liability pursuant to ASC 815, Derivatives and Hedging . In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income (expense) in the statement of operations. On September 6, 2022, the Company agreed to extend the September 10, 2019 and November 6, 2019 warrants an additional six months until March 9, 2023 and May 5, 2023, respectively. The warrants were remeasured as of September 6, 2022 and consequently resulted in a warrant modification expense of $ 57 thousand. The warrants outstanding and fair values at each of the respective valuation dates are summarized below: Schedule of Warrant Liability Warrant Liability Warrants Outstanding Fair Value per Share Fair Value Fair value as of year ended 12/31/2021 265,305 $ 318 Modification of warrants - 57 Change in fair value of warrant liability - ( 133 ) Fair value as of year ended 12/31/2022 265,305 242 Exercise of warrants ( 194,286 ) ( 144 ) Modification of warrants - 29 Change in fair value of warrant liability - 19 Fair value as of year ended 12/31/2023 71,019 $ 146 F- 25 Table of Contents The warrant liabilities are considered Level 3 liabilities on the fair value hierarchy as the determination of fair value includes various assumptions about future activities and the Company’s stock prices and historical volatility of Guideline Public Companies as inputs. 16. Commitments and Contingencies Litigation The Company may be subject to legal proceedings and claims that arise in the ordinary course of business. Management is not currently aware of any matters that will have a material effect on the financial position, results of operations, or cash flows of the Company. Service Agreement On March 21, 2023, the Company entered into a Services Agreement with GlaxoSmithKline Consumer Healthcare Holdings (US) LLC (“Haleon”) to supply material for a consumer product to be developed and released in the future. There can be no guaranty that a consumer product will be released or, if released, that it will be successful. 17. Concentrations of Risk The Company’s revenues are concentrated in a small group of customers with some individually comprising more than 10% of total revenues. For the year ended December 31, 2023, the Company had revenue from one customer that approximated 20 % of total revenue. For the year ended December 31, 2022, the Company had revenue from one customer that approximated 29 % of total revenue. The Company had one customer with accounts receivable balances that approximated 69 % of total accounts receivable as of December 31, 2023. The Company had three customers with accounts receivable balances that approximated 40 %, 22 % and 18 % of total accounts receivable as of December 31, 2022. The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash, cash equivalents and marketable securities. Cash balances are maintained principally at major U.S. financial institutions and are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to regulatory limits. Such cash balances are currently in excess of the FDIC insurance limit of $ 250 thousand. As of December 31, 2023, the total amount exceeding such limit was $ 106 thousand. The Company has not experienced any credit losses associated with its cash balances in the past. The Company invests its cash equivalents in U.S. treasury bills with original maturities of three months or less. Marketable securities are comprised of U.S. treasury bills with original maturities greater than three months. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash, cash equivalents, and marketable securities and performs periodic evaluations of the credit standing of such institutions. F- 26 Table of Contents 18. Related Party Transactions Convertible Promissory Note On September 2, 2021, the Company issued three Secured Convertible Promissory Notes to members of the board of directors in an aggregate amounts of $ 150,000 to Mr. Stein, $ 150,000 to Mr. Stefansky (Bezalel Partners, LLC), and $ 50,000 to Dr. Zeldis as part of the September 2 Notes. The notes were repaid in full in 2022 (See Note 14). Advances Dr. Jerome Zeldis, a member of the Company board of directors, has an outstanding balance due of $ 25,000 and $ 40,000 for services as of December 31, 2023 and 2022, respectively, included in accounts payable in the accompanying consolidated balance sheets. 19. Income Taxes The Company has established a full valuation allowance for its deferred tax assets based on management’s belief that it is not more likely than not that the related deferred tax assets will be realized. For the years ended December 31, 2023 and 2022, there was no income tax expense or benefit. At December 31, 2023 and 2022, the Company had no recorded tax liabilities for uncertain tax positions. The Company does not expect any significant changes to the estimate amount of liabilities associated with uncertain tax positions in the next 12 months. The income tax (benefit) provision consists of the following: Schedule of Income Tax (Benefit) Provision 2023 2022 For The Years Ended December 31 2023 2022 Federal: Current $ ( 617 ) $ ( 619 ) Deferred 617 619 State and local: Current ( 156 ) ( 159 ) Deferred 156 159 Income tax provision $ — $ — For the years ended December 31, 2023 and 2022, the expected tax benefit based on the statutory rate reconciled with the actual benefit is as follows: Schedule of Effective Income Tax Rate Reconciliation 2023 2022 For The Years Ended December 31, 2023 2022 U.S. federal statutory rate 21.0 % 21.0 % State tax rate, net of federal benefit 5.3 % 5.3 % Permanent differences Non-deductible expenses ( 1.9 )% ( 9.7 )% Timing differences — — Change in valuation allowance ( 24.4 )% ( 16.6 )% Income tax provision — % — % For the years ended December 31, 2023 and 2022, differences between the expected tax expense based on the federal statutory rate and the actual tax expense is primarily attributable to the net losses incurred and the corresponding increase to the valuation allowance. F- 27 Table of Contents As of December 31, 2023 and 2022, the Company’s deferred tax assets consisted of the effects of temporary differences attributable to the following: Schedule of Deferred Tax Assets and Liabilities 2023 2022 As of December 31, 2023 2022 Deferred tax assets: Net operating loss carryforwards $ 4,882 $ 4,112 Other 9 6 Total deferred tax assets 4,891 4,118 Valuation allowance ( 4,891 ) ( 4,118 ) Deferred tax assets, net of valuation allowance $ — $ — As of December 31, 2023 and 2022, the Company has approximately $ 18.6 million and $ 15.6 million of federal NOL carryovers, respectively, which begin to expire in 2029 through 2036. Similarly, the subsidiary’s Pennsylvania state returns reported state NOL carryovers of approximately $ 18.6 million and $ 15.6 million, as of December 31, 2023 and 2022, respectively. However, these loss carryforwards on a separate company basis may be subject to limitations on the amounts that may be utilized pursuant to Internal Revenue Code section 382 and applicable state law. Section 382 imposes significant limitations on the utilization of net operating losses after certain changes of corporate ownership. The Company will need to determine the amount of loss carryforwards that may be utilized in the future as necessary. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the future generation of taxable income during the years in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all the evidence, both positive and negative, management has recorded a full valuation allowance against net deferred tax assets at December 31, 2023 and 2022 because management has determined that it is more likely than not that these deferred tax assets will not be realized. The Company is subject to taxation in the U.S. and various states. Based on the history of net operating losses all jurisdictions and tax years are open for examination until the operating losses are utilized or the statute of limitations expires. As of December 31, 2023 and 2022, the Company does not have any significant uncertain tax positions. 20. Subsequent Events Management of the Company has performed a review of events and transactions occurring after the consolidated balance sheet date to determine if there were any such events or transactions requiring adjustment to or disclosure in the accompanying consolidated financial statements, noting no such events or transactions other than the following. On February 15, 2024 (the “Closing Date”), the Company, entered into subscription agreements with investors, the Company’s Chief Financial Officer and certain members of its board of directors for a registered direct offering (“RDO”) of the Company’s common stock. The RDO sold an aggregate 242,891 units at a price to the public of $ 4.22 per unit, with each unit consisting of two shares of the Company’s common stock, and a warrant to purchase one share of Common Stock at an exercise price of $ 4.00 per share. The $ 4.22 purchase price equals two times the last reported sale price of $ 2.11 per share of the Company’s common stock on February 15, 2024 on The Nasdaq Capital Market. The Company issued 485,782 shares of common stock and warrants to purchase up to 242,891 shares of common stock. Subject to certain ownership limitations, each of the warrants will become exercisable on the Closing Date, will have an exercise price of $ 4.00 per share and will expire five years after the Closing Date. The warrants may only be exercised on a cashless basis if there is no registration statement registering, or the prospectus contained in the registration statement is not available for, the issuance or resale of shares of common stock underlying the warrants to or by the holder. The holder of a warrant is prohibited from exercising of any such warrants to the extent that such exercise would result in the number of shares of common stock beneficially owned by such holder and its affiliates exceeding 4.99 % of the total number of shares of common stock outstanding immediately after giving effect to the exercise, which percentage may be increased or decreased at the holder’s election not to exceed 9.99 %. The gross proceeds to the Company from the RDO are expected to be approximately $ 1.025 million, before deducting the placement agent’s fees and other estimated offering expenses payable by the Company, and excluding the proceeds, if any, from the exercise of the warrants. The Company intends to use the net proceeds from the RDO for working capital and for general corporate purposes. The Company retained Alere Financial Partners, LLC (A division of Cova Capital Partners, LLC) to act as the placement agent for the RDO. The Company agreed to pay the placement agent a cash fee of 6 % of the aggregate gross proceeds in the RDO received from non-affiliates of the Company and 3 % of the aggregate gross proceeds in the RDO received from affiliates of the Company. Additionally, and upon the closing of the RDO, the Company agreed to issue to the placement agent warrants exercisable for a period of five years to purchase up to 6 % of the number of shares sold in this offering, or up to 27,725 shares, at a per share exercise price of $ 4.00 . F- 28 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.