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 condensed consolidated 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; 28 Table of Contents ● adverse federal, state and local government regulation; ● technological obsolescence of our manufacturing process and equipment; ● technical problems with our research and products; ● risks of mergers and acquisitions including the time and cost of implementing transactions and the potential failure to achieve expected gains, revenue growth or expense savings; ● price increases for supplies and components; and ● the inability to carry out our business plans. For a discussion of these and other risks that relate to our business and investing in shares of our common stock, you should carefully review the risks and uncertainties described elsewhere in this Quarterly Report on Form 10-Q. The forward-looking statements contained in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. We do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events. Overview We manufacture high water content, electron beam cross-linked, aqueous polymer hydrogels, or gels, used for wound care, medical diagnostics, transdermal drug delivery and cosmetics. We specialize in custom gels by capitalizing on proprietary manufacturing technologies. We have historically served as a contract manufacturer, supplying our gels to third parties who incorporate them into their own products. Beginning in 2020, we created two new lines of business for the company. First, 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. Beginning in December 2023, the Company expanded their product portfolio to include the Kenkoderm brand. Kenkoderm is a skincare line focused on reducing symptoms associated with psoriasis. Kenkoderm products do not utilize our gel technology and are manufactured by third parties. Joint Venture On March 1, 2023, the Company acquired a 50% interest in its newly formed JV 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. Acquisition On December 1, 2023, we purchased substantially all of the assets Olympus Trading Company, LLC (the “Seller”) 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 $136,625. The cash earn-out can fluctuate higher or lower based on the quarterly results of the Kenkoderm business during 2024 according to the formula contained in the Asset Purchase Agreement relating to the Kenkoderm acquisition. 29 Table of Contents Results of Operations The following sections discuss and analyze the changes in the significant line items in the accompanying condensed consolidated statements of operations for the comparison periods identified. Comparison of the Three Months ended March 31, 2024 and 2023 ($ in thousands) Revenues, net . For the three months ended March 31, 2024 revenues were $1,266 and increased by $646, or 104.2%, when compared to $620 for the three months ended March 31, 2023. The increase in our overall revenues was primarily due to sales growth in both our contract manufacturing and branded products. The Company has four distinct lines of business; Contract Manufacturing, Custom and White Label, Consumer Branded Products, and Medical Devices. Contract Manufacturing Customers order rolls of gel (“rollstock”). The rollstock is shipped to our customers, which they package into finished goods. Historically, this has been the Company’s primary source of revenue. Custom 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, which include Medagel, Lumagel Beauty, and Kenkoderm. Medical Devices Medical Devices are a hybrid business, combining elements of Custom and White Label and Consumer Branded Products. Medical Devices, which are not yet marketed, are expected to be distributed through strategic partnerships. The Company will manufacture and possibly convert/package the device while the strategic partner brings the product to market. Small market Medical Devices could be launched by the Company, but also be offered to a distributor to reach the full scale of the market. Gross profit (loss) . Our gross profit was $277 for the three months ended March 31, 2024 compared to a gross loss of $57 for the three months ended March 31, 2023. The increase of $334 in gross loss quarter over quarter was primarily due to the increase in consumer branded products. Gross profit was 21.9% for the three months ended March 31, 2024 compared to a gross loss of (9.2%) for the three months ended March 31, 2023. 30 Table of Contents The components of cost of revenues are as follows for the three months ended March 31, 2024 and 2023 ($ in thousands): Three Months Ended March 31, 2024 2023 Cost of revenues Materials and finished products $ 611 $ 355 Share Based Compensation 3 - Compensation and benefits 181 171 Depreciation and amortization 31 20 Equipment, production and other expenses 163 131 Total cost of revenues $ 989 $ 677 Cost of revenues increased by $312, or 46.1%, to $989 for the three months ended March 31, 2024, as compared to $677 for the three months ended March 31, 2023. The increase in cost of revenues is primarily aligned with the increase in revenue growth. Selling, general and administrative expenses . The following table highlights Selling, general and administrative expenses by type for the three months ended March 31, 2024 and 2023 ($ in thousands): Three Months Ended March 31, 2024 2023 Selling, general and administrative expenses Compensation and benefits $ 252 $ 161 Share-based compensation 51 19 Depreciation and amortization 31 10 Advertising, marketing, & Amazon fees 253 94 Investor & shareholder services 62 96 Franchise tax & corporate insurance 58 44 Professional & consulting fees 364 263 Other expenses and professional fees 75 110 Total Selling, general and administrative expenses $ 1,146 $ 797 Selling, general and administrative expenses increased by $349, or 43.8%, to $1,146 for the three months ended March 31, 2024, as compared to $797 for the three months ended March 31, 2023. The increase in Selling, general and administrative expenses is primarily attributable to the factors described below. Compensation and benefits increased by $91, or 56.5%, to $252 for the three months ended March 31, 2024, as compared to $161 for the three months ended March 31, 2023. The number of employees increased compared to the prior period and officer compensation increased in conjunction with contract renewals. Share-based compensation increased by $32, or 168.4%, to $51 for the three months ended March 31, 2024, as compared to $19 for the three months ended March 31, 2023. The share-based compensation related to the issuance of stock options and restricted awards to our officers, employees, and advisors in the prior year period. Advertising, marketing, Amazon fees increased by $159, or 169.1%, to $253 for the three months ended March 31, 2024, as compared to $94 for the three months ended March 31, 2023. The increase primarily pertains to an increase in consumer branded product sales year over year. Investor and shareholder services decreased by $34, or 35.4%, to $62 for the three months ended March 31, 2024, as compared to $96 for the three months ended March 31, 2023. The decrease is due to a reduction of investor services compared to the prior year period. Franchise taxes and corporate insurance increased by $14, or 31.8%, to $58 for the three months ended March 31, 2024, as compared to $44 thousand for the three months ended March 31, 2023. 31 Table of Contents Professional and consulting fees increased by $101, or 38.4%, to $364 for the three months ended March 31, 2024, as compared to $263 for the three months ended March 31, 2023. We continued to incur accounting and consulting fees associated with public company governance requirements. Additionally, we incurred significant expenses related to our European Medical Device Regulation project in preparation for entering European markets. Other Expenses decreased by $35, or 31.8%, to $75 for the three months ended March 31, 2024 from $110 for the three months ended March 31, 2023. Other Selling, general and administrative expenses generally consist of costs associated with our selling efforts and general management, including information technology, travel, training and recruiting. Research and development expenses . Research and development expenses were $2 and $29 for the three months ended March 31, 2024 and March 31, 2023, respectively. Liquidity and Capital Resources Cash Flow (in thousands) March 31, March 31, 2024 2023 Net cash used in operating activities $ (1,092 ) $ (709 ) Net cash provided by (used in) investing activities (118 ) 397 Net cash provided by (used in) financing activities 929 (2 ) Net increase (decrease) in cash and cash equivalents (281 ) (314 ) Cash and cash equivalents at beginning of year 2,700 1,101 Cash and cash equivalent at end of quarter $ 2,419 $ 787 As of March 31, 2024, we had $2,419 of cash and cash equivalents , compared to $2,700 of cash and cash equivalents at December 31, 2023. Net cash used in operating activities was $1,092 and $709 for the three months ended March 31, 2024 and 2023, respectively. Net cash used in investing activities was $118 and net cash provided by $397 for the three months ended March 31, 2024 and 2023, respectively, consisting of the sales of marketable securities of $34 and the purchase of capital equipment of $152 for three months ended March 31, 2024 and consisting of the sales of marketable securities of $485 and purchases of capital equipment of $88 for three months ended March 31, 2023. Net cash provided by financing activities for the three months ended March 31, 2024 was $929 consisting of net proceeds from the RDO of $946, offset by principal payments of notes payable of $8 and by principal payment on financing lease liability of $9. Net cash used in financing activities for March 31, 2023 was $2 is attributable to the principal payments of notes payable. At March 31, 2024, current assets totaled $4,863 and current liabilities totaled $2,483, as compared to current assets totaling $5,052 and current liabilities totaling $2,549 at December 31, 2023. As a result, we had working capital of $2,380 at March 31, 2024, compared to a working capital of $2,503 at December 31, 2023. The change in the working capital as of March 31, 2024 is primarily attributable to the loss from operations of $871 and the net proceeds of $946 from the RDO. 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. 32 Table of Contents 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 believe we have sufficient capital to maintain as a going concern due to the recent capital raise on February 14, 2024 (discussed further within Note 20). We believe we have sufficient cash and marketable securities to operate our business plan into 2025. 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 financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and liabilities that might be necessary should we be unable to continue as a going concern. Additionally, it is reasonably possible that estimates made in the financial statements have been, or will be, materially and adversely impacted in the near term as a result of these conditions, including the recoverability of long-lived assets. Off Balance Sheet Arrangements As of March 31, 2024, 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 accompanying condensed consolidated 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. 33 Table of Contents 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required.