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 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. In May 2023, we formed a joint venture
with CG Laboratories, Inc. called CG Converting and Packaging, LLC, which is located in Granbury, Texas and of 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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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.
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 Spotify 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, 2024 Compared to the
Year Ended December 31, 2023 ($ in thousands)
Revenues, net
For the year ended December 31, 2024 revenues were
$8,688 and increased by $4,599, or 112.5%, when compared to $4,089 for the year ended December 31, 2023. The increase in our overall
revenues was primarily due to sales growth in our branded consumer products, including gross revenue from Silly George of $2,889 for
the period of acquisition through December 31, 2024, and an increase in Other Revenues of $238, which mostly consists of shipping
revenue on our branded consumer products.
Gross profit (loss)
Our gross profit was $2,748 for the year ended December 31, 2024 compared to
a gross profit of $374 for the year ended December 31, 2023 The increase of $2,374 in gross profit recorded for the year ended December
31, 2024, as compared to December 31, 2023, was primarily due to an increase in branded consumer products. Gross profit was approximately
31.6% for the year ended December 31, 2024 compared to a gross profit of 9.1% for the year ended December 31, 2023.
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The components of cost of revenues are as follows
for the years ended December 31, 2024 and 2023 ($ in thousands):
Year Ended December 31,
2024
2023
Cost of revenues
Materials and finished products
$ 3,987
$ 2,147
Compensation and benefits
497
451
Share-based compensation
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14
Depreciation and amortization
280
103
Commission and contract fees
523
245
Equipment, production and other expenses
633
755
Total cost of revenues
$ 5,940
$ 3,715
Cost of revenues increased by $2,225 or 59.9%,
to $5,940 for the year ended December 31, 2024, as compared to $3,715 for the year ended December 31, 2023. The increase in cost of
revenues is primarily aligned with sales of branded consumer products. As mentioned elsewhere, Silly George was acquired in May 2024
while Kenkoderm was acquired in December 2023.
Selling, general and administrative expenses .
The following table highlights selling, general and administrative expenses by type for the years ended December 31, 2024 and 2023 ($
in thousands):
Year Ended December 31,
2024
2023
Selling, general and administrative expenses
Compensation and benefits
$ 1,020
$ 740
Share-based compensation
337
203
Depreciation and amortization
156
126
Advertising, marketing, and Amazon fees
2,220
440
Investor and shareholder services
273
426
Franchise taxes and corporate insurance
157
224
Professional and consulting fees
1,651
1,339
Other expenses and professional fees
410
250
Total selling, general and administrative expenses
$ 6,224
$ 3,748
Selling, general and administrative expenses increased by $2,476 or 66.1%, to $6,224
for the year ended December 31, 2024, as compared to $3,748 for the year ended December 31, 2023. The increase in Selling, general and
administrative expenses is primarily attributable to the factors described below.
Compensation and benefits increased by $280, or 37.8%,
to $1,020 for the year ended December 31, 2024, as compared to $740 for the year ended December 31, 2023. The primary increase in expense, when compared to the prior period, is the increase in contract labor with the inclusion
of Silly George.
Share-based compensation increased by $134, or 66.0%,
to $337 for the year ended December 31, 2024, as compared to $203 for the year ended December 31, 2023. The increase related to the issuance
of stock options and restricted awards to our officers, employees, board of directors, and advisors.
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Advertising, marketing, and Amazon fees increased by $1,780, or 404.5%, to $2,220 for
the year ended December 31, 2024, as compared to $440 for the year ended December 31, 2023. The increase is due to the increased Amazon
selling fees and an increase in advertising and marketing attributable to promoting Kenkoderm and Silly George.
Investor and shareholder services decreased by $153,
or 35.9%, to $273 for the year ended December 31, 2024, as compared to $426 for the year ended December 31, 2023. The decrease is due
to a net reduction of investor services compared to the prior year period.
Franchise taxes and corporate insurance decreased
by $67, or 29.9%, to $157 for the year ended December 31, 2024, as compared to $224 for the year ended December 31, 2023. The vast majority of this decrease pertains to the Company’s reduction in authorized shares, which lowered
its franchise tax expense. The Company enjoyed the full benefit of the reduction in authorized shares throughout 2024, as opposed to a
partial benefit in 2023.
Professional and consulting fees increased by $312,
or 23.3%, to $1,651 for the year ended December 31, 2024, as compared to $1,339 for the year ended December 31, 2023. We continued to
incur accounting and consulting fees associated with public company governance requirements and professional services related to branded
consumer products. Additionally, consulting fees increased in 2024 with the acquisition of Silly George, which utilizes numerous consultants
to assist with marketing, IT, graphic design, and various other services.
Other expenses increased by $160, or 64.0%, to $410 for the year ended December
31, 2024 from $250 for the year ended December 31, 2023. Other Selling, general and administrative expenses generally consist of normal
costs associated with our selling efforts and general management, including information technology, travel, training and credit card processing fees. Credit card processing fees in particular increased significantly from 2023 to 2024
with the inclusion of Silly George.
Research and development expenses
Research and development expenses decreased by $25
to $78 for the year ended December 31, 2024 from $103 for the year ended December 31, 2023. 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,
2024
2023
Net cash used in operating activities
$ (3,867 )
$ (3,236 )
Net cash provided by (used in) investing activities
(775 )
4,456
Net cash provided by financing activities
3,749
379
Net increase (decrease) in cash and cash equivalents
(893 )
1,599
Cash and cash equivalents at beginning of year
2,700
1,101
Cash and cash equivalent at end of year
$ 1,807
$ 2,700
As of December 31, 2024, we had $1,807 thousand
of cash and cash equivalents compared to $2,700 thousand of cash and cash equivalents at December 31, 2023. Net cash used in
operating activities was $3,867 thousand and $3,236 thousand for the years ended December 31, 2024 and 2023, respectively.
Net cash used in investing activities was $775
thousand and net cash provided by investing activities was $4,456 thousand for the year ended December 31, 2024 and 2023,
respectively, consisting of 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 for the year ended December 31, 2024 while the sales
of marketable securities of $5,699 thousand, offset by purchases of capital equipment of $696 thousand and the Kenkoderm acquisition
of $547 thousand were for the year ended December 31, 2023.
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. Net cash provided by financing activities for
year ended December 31, 2023 was $379 thousand which is attributable to the proceeds of equipment notes payable of $315 thousand,
proceeds from margin line of credit of $245 thousand, offset by principal payments of notes payments of $6 thousand and payments of
$175 thousand made on the operating lease liability.
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At December 31, 2024, current assets totaled
$5,114 thousand and current liabilities totaled $2,470 thousand, as compared to current assets totaling $5,052 thousand and current
liabilities totaling $2,549 thousand at December 31, 2023. As a result, we had working capital of $2,644 thousand at December 31,
2024, compared to a working capital of $2,503 thousand at December 31, 2023. The increase in the working capital as of
December 31, 2024 is primarily attributable to the loss from operations of $3,554 thousand and proceeds from rights offering of
$3,772 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
November 20, 2024 provides working capital necessary to continue our strategic objectives (discussed further within Note 13). 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, 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 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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