NEXGEL, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 14, 2020. Financial amounts below are in thousands of dollars unless stated otherwise. The 2019 comparison is presented on a pre-spin-off carve-out basis, while 2020 reflects NexGel as a standalone company.
Business context and results
NEXGEL manufactures custom aqueous polymer hydrogels for wound care, diagnostics, drug delivery and cosmetics. Historically a contract manufacturer, the company is also pursuing proprietary consumer products and white-label opportunities.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $240 | $129 |
| Gross profit (loss) | $67 | $(108) |
| Gross margin | About 28% | About (84%) |
| Selling, general and administrative expense | $576 | $504 |
| Operating loss | $(509) | $(612) |
| Net loss | $(508) | $(612) |
| Net loss per share, basic and diluted | $(0.01) | $(0.12) |
| Net cash used in operating activities | $(660) | $(556) |
Revenue rose $111, or approximately 86%, which management attributed to increased contract-manufacturing orders. Gross profit improved mainly because of lower materials, labor and overhead costs on fulfilled orders. SG&A rose $72, primarily due to professional and administrative costs of operating as a standalone company; Q1 2020 also included $64 of share-based compensation.
Financial position and liquidity
- Cash was $220 at March 31, 2020, versus $261 at December 31, 2019. Operating cash use of $660 exceeded the $620 raised from common-stock issuance; investing cash use was $1.
- Current assets were $614 and current liabilities were $716, leaving a $102 working-capital deficit, improved from $287 at year-end 2019.
- Total assets were $1,955 and total liabilities were $1,399. The balance sheet included $890 of operating lease liabilities ($207 current and $683 long-term); the filing reports no other conventional borrowings at quarter-end.
- Stockholders’ equity was $556. The company issued 15.5 million shares for $620 during the quarter, increasing shares outstanding from 57.5 million at year-end to 73.0 million at March 31.
Outlook, risks and notable items
- Going concern: Management expects continued losses and says additional capital is needed. The filing states that the need to raise capital and achieve profitable operations raises substantial doubt about the company’s ability to continue as a going concern. No assurance is given that funding will be available on acceptable terms.
- Strategy: Management plans to grow contract manufacturing, develop consumer-product offerings for branding partners, and test-market its own products. No quantified revenue, earnings or cash-flow guidance is provided.
- Customer and supplier concentration: Two customers represented 53% and 32% of Q1 2020 revenue. The filing also identifies reliance on a small group of customers and one supplier as a vulnerability.
- COVID-19: Management said the pandemic could reduce revenue, cause labor or supply shortages, hinder capital raising, and adversely affect asset recoverability; the financial impact was uncertain.
- Subsequent funding: After quarter-end, NEXGEL received an $8 EIDL loan described as not repayable and entered into a $147.3 PPP loan at 1% interest, with a two-year term and payments deferred for six months. The company intended to seek PPP forgiveness but could not assure it would be granted.
- Equity and dilution: The company granted 5.9 million restricted shares to its CEO/interim CFO and 5.7 million options to directors during the quarter. Stockholder approval had authorized a substantial increase in authorized shares and a possible 1-for-30 to 1-for-100 reverse split; neither amendment had been implemented as of the filing date.
- Reporting status: The cover page marks “No” to whether the company had filed all required Exchange Act reports during the preceding 12 months.
Most important facts for investors to verify
- Whether NEXGEL raised sufficient additional capital after March 31 to fund operations, and its current cash runway and going-concern status.
- Whether the PPP loan qualified for, and ultimately received, forgiveness; and the terms and use of subsequent funding.
- Whether revenue growth and improved gross margin are sustainable, given customer concentration and the limited historical comparison for a standalone business.
- The status and potential dilution effects of the authorized-share increase, reverse-split proposal, restricted stock, options and warrants.
- The warrant valuation disclosures: the filing reports a $54 ending warrant liability but includes an apparent inconsistency in one Black-Scholes fair-value-per-share figure; investors should confirm the intended value.