Item 7. Management’s Discussion and Analysis
Item
7. 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 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.
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 distribute our products as a contract
manufacturer, supplying our gels to third parties who incorporate them into their own products. We also have a line of branded consumer
products sold direct to consumers and 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. Our joint venture with CG Laboratories, Inc. called CG Converting and Packaging, LLC, which is located in Granbury,
Texas in which we own a 50% interest, allowing us to expand our ability to deliver finished goods to our growing customer base.
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Lines
of Business
We
have four distinct lines of business; Contract Manufacturing, Custom & White Label, Consumer Branded Products, and Medical Devices/Other.
Contract
Manufacturing
Customers
order rolls of gel (“rollstock”). The rollstock is shipped to our customers, which they package into finished goods. Historically,
this has been the Company’s primary source of revenue.
Custom
& White Label
These
products often infuse various ingredients into our base gel to develop unique product offerings to satisfy market demand (e.g. aloe infused
into the gel for a beauty mask). The rollstock is converted and packaged into salable units. The finished goods are shipped to the customer,
who is ultimately responsible for product distribution. Frequently these products started as development deals, in which the customer
paid the company a small fee to develop a specific product. Once completed, the customer places a large order for newly developed product.
Consumer
Branded Products
These
products are finished goods marketed and sold directly to the customer by the Company through online and retail channels. We are responsible
for sales, marketing, and distribution. The products we sell under our MedaGel brand primarily relate to healthcare over-the-counter
(“OTC”) remedy solutions, such as blister and pain applications. In December 2023 we added a second consumer product brand
when we completed the purchase of the Kenkoderm brand. The Kenkoderm skincare line was originally developed by a dermatologist to provide
gentle to the skin products for consumer with psoriasis. In May 2024, we added our third consumer product brand with the purchase of
the Silly George brand. Silly George is a beauty brand primarily focused on false eyelashes and other eye related products. We continue
to look for additional potential acquisitions as part of our consumer product ‘roll-up” strategy.
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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. We 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 us, but also be offered
to a distributor to reach the full scale of the market.
Other
includes freight charged to customers who purchase the Company’s branded consumer products through their Shopify stores.
Results
of Operations
The
following sections discuss and analyze the changes in the significant line items in our statements of operations for the comparison years
identified.
Year
Ended December 31, 2025 Compared to the Year Ended December 31, 2024 ($ in thousands)
Revenues,
net
Year Ended December 31,
2025
2024
Revenues, net
$ 11,421
$ 8,688
For
the year ended December 31, 2025 revenues were $11,421 and increased by $2,733, or 31.5%, when compared to $8,688 for the year ended
December 31, 2024. The increase in our overall revenues was primarily due to sales growth in our branded consumer products, as the prior
year period included gross revenue for a partial year from Silly George from May 15, 2024 through December 31, 2024.
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Cost
of revenues are as follows for the years ended December 31, 2025 and 2024 ($ in thousands):
Year Ended December 31,
2025
2024
Cost of revenues
$ 6,912
$ 5,940
Cost of revenues increased by $972 or 16.4%, to $6,912 for the year ended
December 31, 2025, as compared to $5,940 for the year ended December 31, 2024. The increase in cost of revenues is primarily aligned with
sales of branded consumer products and the acquisition of Silly George in the prior year period which increased by 50.8%.
Gross
profit (loss)
Our gross profit was $4,509 for the year ended December 31, 2025 compared
to a gross profit of $2,748 for the year ended December 31, 2024 The increase of $1,761 in gross profit recorded for the year ended December
31, 2025, as compared to December 31, 2024, was primarily due to an increase in branded consumer products. Gross profit was approximately
39.5% for the year ended December 31, 2025 compared to a gross profit of 31.6% for the year ended December 31, 2024.
Selling,
general and administrative expenses . Selling, general and administrative expenses are as follows for the years ended December 31,
2025 and 2024 ($ in thousands):
Year Ended December 31,
2025
2024
Selling, general and administrative expenses
$ 7,859
$ 6,224
Selling, general and administrative expenses increased by $1,635 or 26.3%,
to $7,859 for the year ended December 31, 2025, as compared to $6,224 for the year ended December 31, 2024. The increase in Selling, general
and administrative expenses is primarily attributable to an increase in compensation and benefits (including share-based benefits) of
$816, advertising and marketing increases of $282, an increase in professional and consulting fees of $258, and other expense of $205.
Research
and development expenses
Research
and development expenses decreased by $76 to $2 for the year ended December 31, 2025 from $78 for the year ended December 31, 2024. Research
and development expenses are related to research costs incurred for potential products for existing or new customers.
Liquidity
and Capital Resources
Cash
Flow (in thousands)
Years Ended December 31,
2025
2024
Net cash used in operating activities
$
(1,311
)
$
(3,867
)
Net cash provided by (used in) investing activities
(68
)
(775
)
Net cash provided by financing activities
630
3,749
Net increase (decrease) in cash and cash equivalents
(749
)
(893
)
Cash and cash equivalents at beginning of year
1,807
2,700
Cash and cash equivalent, and restricted cash at end of year
$
1,058
$
1,807
As of December 31, 2025, we had $317 of cash and cash equivalents and $741
of restricted cash compared to $1,807 thousand of cash and cash equivalents at December 31, 2024. Net cash used in operating activities
was $1,311 thousand and $3,867 thousand for the years ended December 31, 2025 and 2024, respectively.
Net
cash used in investing activities was $68 thousand and $775 thousand for the years ended December 31, 2025 and 2024, respectively. Net
cash used in investing activities for 2025 was attributable to the purchases of capital equipment while net cash used in investing activities
for 2024 was attributable to the sales of marketable securities of $68 thousand, offset by purchases of capital equipment of $443 thousand
and the investment in the subsidiary Semmens Online of $400 thousand.
Net cash provided by financing activities for year ended December 31, 2025
was $630 thousand which was attributable to the proceeds from rights offering of $963 thousand, offset by principal payments of notes
payments of $97 thousand, and change in contingent consideration of $177 thousand made on the operating lease liability, and $59 thousand
of principal payment of financing lease liability.
Net
cash provided by financing activities for year ended December 31, 2024 was $3,749 thousand which is attributable to the proceeds from
rights offering of $3,772 thousand, proceeds from non-controlling interest of $38 thousand, and proceeds from margin line of credit of
$345 thousand, offset by principal payments of notes payments of $77 thousand, and change in contingent consideration of $279 thousand
made on the operating lease liability, and $50 thousand of principal payment of financing lease liability.
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At December 31, 2025, current assets totaled $4,477 thousand and current
liabilities totaled $3,095 thousand, as compared to current assets totaling $5,114 thousand and current liabilities totaling $2,470 thousand
at December 31, 2024. As a result, we had working capital of $1,382 thousand at December 31, 2025, compared to a working capital of $2,644
thousand at December 31, 2024. The decrease in the working capital as of December 31, 2025 is primarily attributable to the loss from
operations of $3,352 thousand and proceeds from rights offering of $963 thousand and proceeds from Stada of $1,000 thousand.
We
have never declared or paid any cash dividends on our common stock. For the foreseeable future, we anticipate that all available funds
and any earnings generated in our business will be used to finance the growth of our business and will not be paid out as dividends to
our shareholders. Any future determination related to our dividend policy will be made at the discretion of our Board of Directors and
will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions,
business prospects and other factors our Board of Directors may deem relevant.
Management
is exploring new product channel sales in consumer products, such as cosmetics, athletic products, and proprietary medical devices. The
Company has increased its focus on sales and developing a sales pipeline for potential customers. This customer base expansion will enable
us to provide financial stability for the foreseeable future, expand our current processes, and position us for long-term shareholder
value creation.
Our
recent capital raise which closed on or about August 5, 2025 provides working capital necessary to continue our strategic objectives (discussed
further within Note 14). We intend to maintain and attempt to grow our existing contract manufacturing business. We also plan to continue
building and developing our catalogue 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 December 31, 2025, 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 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.
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
7A. Quantitative and Qualitative Disclosures About Market Risk
Not
required.
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