NEXGEL, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial statement amounts are in thousands of dollars unless noted otherwise. The company manufactures hydrogel materials and is pursuing a shift from contract manufacturing toward branded consumer products and white-label opportunities. 2019 comparative results include pre-spin-off carve-out reporting, so comparability is limited.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $91 | $125 | $331 | $254 |
| Gross profit (loss) | $(85) | $(66) | $(18) | $(174) |
| Gross margin | (93%) | (53%) | (5%) | (68%) |
| Operating expenses | $455 | $1,007 | $1,031 | $1,511 |
| Operating loss | $(540) | $(1,073) | $(1,049) | $(1,685) |
| Net loss | $(530) | $(1,073) | $(1,038) | $(1,685) |
| Basic and diluted loss per share | $(0.01) | $(0.21) | $(0.01) | $(0.34) |
For the six months, operating cash use was $980; investing cash use was $76; financing provided $1,028, including $620 from stock issuance and $408 from notes payable. Cash declined $28 from year-end to $233. At June 30, current assets were $514 and current liabilities $903, a $389 working-capital deficit and approximately 0.57 current ratio. Total liabilities were $1,818, including $407 of notes payable and $862 of operating lease liabilities; stockholders’ equity was $441. The company reported $104 of share-based compensation for the six-month period.
Changes versus comparable periods
- Q2 revenue fell $34, or about 27%, and the gross loss widened by $19. Management attributed the quarterly revenue decline to COVID-19, while noting sales had begun returning to higher levels.
- Six-month revenue increased $77, or about 30%, which management attributed to increased sales efforts with existing customers. The six-month gross loss narrowed substantially, which management linked to higher contract-manufacturing volume and lower manufacturing labor costs.
- Operating expenses declined $552 in Q2 and $480 for the six months, primarily reflecting lower professional fees and other expenses, including the absence of prior-year spin-off costs. Despite lower expenses, the company remained loss-making.
Outlook, risks and unusual items
- Going concern: Management expects continued losses and says additional capital is needed. The filing states that substantial doubt exists about the company’s ability to continue as a going concern; no assurance is given that financing will be available on acceptable terms.
- COVID-19: The company cited possible revenue declines, labor and supply shortages, and difficulty raising capital. Its customer and supplier concentrations may heighten the impact.
- Concentration: Three customers accounted for 23%, 27% and 39% of six-month revenue. Four customers represented 59%, 13%, 12% and 11% of accounts receivable at June 30.
- Financing and dilution: The company received a $147,300 Paycheck Protection Program loan, potentially forgivable subject to program requirements, and an SBA EIDL loan of up to $260,500 at 3.75%; the filing says an $8,000 advance need not be repaid. After quarter-end, it agreed to sell 5.5 million shares for $330,000; those shares had not been issued as of the filing date.
- Acquisition: NexGel acquired Sport Defense LLC on May 29 for 9.375 million shares valued at $375,000. The preliminary allocation included approximately $367 of goodwill; the purchase-price allocation was not final. The CEO/CFO and a director were sellers, with the director recusing himself from the board vote and an independent valuation obtained.
- No numeric financial guidance was provided. Management describes plans to develop consumer products and pursue additional capital, but gives no quantified targets or timetable. The filing reports no off-balance-sheet arrangements and says pending legal matters are not expected to materially affect results.
Investor verification priorities
- Review the going-concern disclosure, cash runway, working-capital needs and status of planned or subsequent equity financing.
- Confirm the amounts funded, repayment terms and forgiveness status of the PPP and EIDL loans.
- Assess customer and supplier concentration, COVID-19 effects, and whether revenue recovery and improved manufacturing margins continued after June 30.
- Check the final Sport Defense purchase-price allocation, integration progress and related-party transaction disclosures.
- Evaluate potential dilution: 88,213,541 common shares were outstanding as of August 14, 2020; the company had also reserved 17 million shares for its incentive plan and 5.25 million for warrants. The authorized common-share count had been increased to 3 billion.
- Reconcile the six-month gross loss: the financial statements report $18, while MD&A says $17. Also note the filing’s cover page marks “No” for having filed all required reports during the preceding 12 months.