NEXGEL, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unless stated otherwise, dollar amounts are in thousands. NEXGEL manufactures hydrogel materials for third parties and sells branded consumer products; it also has a 50%-owned converting and packaging joint venture (JV), consolidated in its financial statements.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1,221 | $568 | $3,007 | $1,524 |
| Gross profit | $344 | $148 | $461 | $220 |
| Gross margin | 28.2% | 26.1% | 15.3% | 14.4% |
| Operating loss | $(612) | $(1,037) | $(2,258) | $(2,567) |
| Net loss attributable to NEXGEL stockholders | $(550) | $(1,227) | $(2,059) | $(4,098) |
| Basic and diluted loss per share | $(0.10) | $(0.22) | $(0.36) | $(0.74) |
Revenue rose 115% in Q3 and 97% year to date. Management attributed growth to contract manufacturing and branded products, and reported $1,375 of JV revenue from March 1 through September 30. Gross profit increased, with management citing higher contract manufacturing volumes against fixed costs. Nine-month cost of revenue rose 95% to $2,546, broadly in line with revenue growth. R&D declined to $6 in Q3 and $90 year to date, following completion of two drug-delivery proof-of-concept studies.
Cash flow, liquidity and debt
- Cash was $3,266 at September 30, 2023, versus $1,101 at December 31, 2022; marketable securities fell from $5,508 to zero as securities were sold or matured.
- For the first nine months, operating cash use was $2,649, compared with $2,343 in 2022. Investing activities provided $4,729, primarily from $5,340 in marketable-security sales, partly offset by $611 in capital expenditures. Financing provided $85.
- Working capital was $4,238, down from $6,646 at year-end 2022. Current assets were $5,881 and current liabilities $1,643.
- Notes payable totaled approximately $279, including the EIDL loan. An $89 margin-line balance was included in current accrued liabilities. Operating lease liabilities totaled $2,007, of which $233 was current.
Material changes, outlook and risks
- The JV began operations in March 2023. NEXGEL contributed its full $500 commitment and consolidated the JV; a $500 equipment contribution is reflected as noncash investing/financing activity.
- Management believes available cash and marketable securities are sufficient to fund its business plan through 2024, but expects near-term losses and says additional debt or equity financing may be needed. Long-term viability depends on growing products and achieving profitability; financing availability and terms are not assured.
- Plans include growing contract manufacturing, expanding branded and white-label products, exploring cosmetics and athletic-product channels, developing medical devices and drug-delivery programs, and evaluating strategic initiatives. The filing provides no quantified revenue or earnings guidance.
- Risks highlighted include limited capital, customer or supplier loss, customer concentration, competition, regulatory and manufacturing compliance, technology obsolescence, execution of product plans, and the possibility of needing additional capital. Three customers accounted for 20%, 11% and 10% of nine-month revenue.
- A March 2023 services agreement with a Haleon group company covers material for a consumer product to be developed; the filing cautions that launch and commercial success are not assured. Management reported no known material litigation and no material off-balance-sheet arrangements.
- Management concluded disclosure controls were effective at a reasonable level of assurance as of September 30, 2023; no material change in internal control was reported during the quarter.
Most important facts for investors to verify
- Whether revenue growth and gross-margin improvement continue, particularly excluding or separately assessing the JV’s contribution.
- Cash runway assumptions behind management’s expectation of funding operations through 2024, given operating cash use, continued expected losses and potential financing needs.
- JV performance, economics and cash requirements, including the impact of consolidating a 50%-owned entity.
- Customer concentration and collection exposure: accounts receivable were $1,158, up from $222 at year-end; the filing reports material balances with multiple customers.
- Potential equity dilution: 3,442,904 warrants were outstanding against 5,717,629 common shares outstanding at September 30, with additional options and restricted units; most warrants had exercise prices above estimated stock value at period-end.
- Whether the Haleon-related product is developed and launched, and whether planned branded products, medical devices and new channels generate sustainable sales.