NEXGEL, Inc. — Q1 2021 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. NexGel manufactures hydrogel products for medical and other applications; it is shifting from contract manufacturing toward consumer and branded products. The company reported one operating segment.
Key financial results
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $267,000 | $240,000; up 11% |
| Gross profit (loss) | $(42,000); margin approximately (16%) | $67,000; margin approximately 28% |
| Operating expenses | $478,000 | $576,000; down $98,000 |
| Operating loss | $(520,000) | $(509,000) |
| Net loss | $(704,000) | $(508,000) |
| Basic and diluted loss per share | $(0.01) | $(0.01) |
| Operating cash flow | $(345,000) | $(660,000) |
| Investing cash flow | $(267,000) | $(1,000) |
| Financing cash flow | $1.650 million | $620,000 |
Liquidity and balance sheet. Cash was $1.070 million at March 31, up from $32,000 at year-end, principally following financing. Current assets were $1.450 million and current liabilities $1.602 million, leaving a $152,000 working-capital deficit, improved from $969,000 at December 31, 2020. Total assets were $3.426 million, liabilities $2.426 million, and stockholders’ equity $1.000 million.
Debt and obligations. The March 11 Auctus financing was a $1.5 million senior secured convertible note; net proceeds were $1.337 million. It bears 12% annual interest, has a one-year maturity, and is convertible at $0.10 per share, with warrants for up to 11 million shares at $0.125 and $0.15. The note is secured by company assets and includes default and registration provisions. Its reported carrying amount was $92,000 after discounts and financing-related accounting adjustments. The company also reported $275,000 of PPP loans, $256,000 of long-term notes payable, and operating lease liabilities of $775,000 in total. The filing describes an EIDL loan with a March 31 balance of approximately $269,000; the relationship between this and balance-sheet debt line items is not clearly reconciled in the supplied text.
Material changes and management commentary
- Revenue growth was attributed mainly to consumer-product sales initiated in Q1. However, cost of revenue rose to $309,000 from $173,000, primarily due to costs to restart the plant accelerator after an upgrade and increased materials. Management anticipated greater facility utilization during 2021.
- SG&A declined mainly because of lower professional and administrative fees and staffing adjustments; share-based compensation increased to $90,000 from $64,000.
- Capital spending was $267,000, related to facility upgrades. Management described plans to grow contract manufacturing, develop consumer products and branded offerings, and expand the customer base. No numerical revenue or earnings guidance was provided.
- Management expects continued losses and may need additional capital. The filing states that substantial doubt exists about the company’s ability to continue as a going concern, dependent on raising capital and achieving profitability; no assurance of financing is given.
Risks, contingencies, and unusual items
- Revenue is concentrated: three customers accounted for 28%, 24%, and 16% of Q1 2021 revenue. The filing also identifies significant customer concentration in receivables and reliance on a limited customer and supplier base.
- The Auctus note’s secured status, conversion and warrant terms, prepayment penalty, registration deadlines, and default provisions create financing, dilution, and potential repayment risks. The company issued 3.563 million common shares for $285,000 during the quarter and had 19.828 million warrants outstanding at March 31.
- COVID-19-related disruption may affect revenue, labor and supply availability, capital raising, and asset recoverability. The filing also cites competition, manufacturing compliance, technology obsolescence, and execution risks.
- PPP loan forgiveness was not assured. Ordinary-course legal matters were disclosed; management did not expect them to materially affect financial position, results, or cash flows. The company reported no off-balance-sheet arrangements and stated disclosure controls were effective.
- The cover page indicates the company checked “No” to having filed all required Exchange Act reports during the preceding 12 months. This is a filing-compliance point for investors to confirm.
Important facts for investors to verify
- Reconcile reported shares outstanding: the balance sheet and cover page show 102,893,779, while the statement of stockholders’ equity shows 102,894,279 at March 31, 2021.
- Confirm the company’s filing status and any implications of its “No” response regarding timely filing of required reports.
- Review the Auctus note’s current outstanding balance, collateral, conversion and warrant dilution, registration compliance, and maturity/refinancing plan.
- Clarify the presentation and reconciliation of EIDL and other note balances, and the status of PPP forgiveness and repayment obligations.
- Assess whether revenue growth and facility utilization can improve gross margins, while monitoring customer concentration, cash burn, and the need for further capital.