NEXGEL, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Financial statement amounts below are in thousands of dollars unless otherwise noted. NexGel, then named AquaMed Technologies, became independent in a June 21, 2019 spin-off; pre-spin-off periods are presented on a carve-out basis, so comparisons are not fully like-for-like. The company changed its name to NexGel in November 2019.
Business context
NexGel manufactures custom aqueous polymer hydrogels for wound care, diagnostics, drug delivery, and cosmetics, historically as a contract manufacturer. Management said it was pursuing a strategy to develop proprietary branded consumer products and white-label opportunities. The company decided in August 2019 to stop pursuing merger opportunities and operate as a stand-alone business.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2019 / 2018 | $287 / $348 | $541 / $1,752 |
| Gross profit (loss), 2019 / 2018 | $74 / $(10) | $(100) / $424 |
| Gross margin, 2019 / 2018 | 26% / (3%) | (18%) / 24% |
| Net income (loss), 2019 / 2018 | $74 / $(754) | $(1,611) / $(1,229) |
| Basic and diluted EPS, 2019 / 2018 | $0.01 / $(0.15) | $(0.31) / $(0.25) |
- Third-quarter revenue fell $61,000, or about 18%, year over year, due to lower contract-manufacturing orders. Gross profit improved primarily because material, labor, and overhead costs were lower.
- Third-quarter SG&A was reported as zero, versus $744,000 a year earlier. The 2019 figure included a $186,000 credit from negotiated settlements of professional-service payables; the settlements were unusual and helped produce the quarter’s reported profit.
- Nine-month revenue declined $1.211 million, about 69%, reflecting lower customer orders. Gross margin moved from 24% to a gross loss margin of 18%, which management attributed primarily to lower sales volume.
- At September 30, cash was $88,000; current assets were $361,000 and current liabilities were $705,000, for a $344,000 working-capital deficit. Cash was zero at December 31, 2018; the working-capital deficit then was $46,000.
- Nine-month operating cash use was $1.427 million, compared with $1.811 million in 2018. Financing provided $1.515 million, including $1.345 million of former-parent contributions and $170,000 net proceeds from stock issuance. Investing cash flow was zero.
- Total liabilities were $1.441 million, including $943,000 of operating lease liabilities ($207,000 current and $736,000 long-term). The filing reports no interest paid; it does not identify conventional interest-bearing borrowings.
Capital, liquidity, and material developments
- The June spin-off transferred net liabilities of $59,000 to NexGel. September 2019 private-placement proceeds were reported as $175,000 gross, with $170,000 net of issuance costs; 3,269,500 shares were issued at a stated $0.053525 per share.
- The September placement included full-ratchet price protection. Following a November 6, 2019 private placement priced at $0.014 per share, NexGel issued an additional 49,230,497 shares and raised $560,000. The filing says the proceeds were intended for working capital and general operations. The company reported 57,505,208 common shares outstanding as of January 28, 2020.
- Three customers generated 41%, 19%, and 16% of nine-month 2019 revenue. The same customers represented 34%, 46%, and 0% of period-end receivables, respectively, creating significant customer and collection concentration.
- The company’s operating lease for its Pennsylvania manufacturing and office facility runs through January 2026. Undiscounted remaining payments were $1.313 million; the recorded liability was $943,000.
Outlook, risks, and other disclosures
Management expects continued losses and says additional capital is needed to fund operations. It disclosed substantial doubt about the company’s ability to continue as a going concern, dependent on raising capital and achieving profitability; no assurance was given that financing would be available on acceptable terms. The financial statements include no adjustments that might be needed if the company cannot continue as a going concern.
Other identified risks include inadequate capital, customer or supplier loss, competition, regulatory and manufacturing-compliance requirements, technological obsolescence, and the need for substantial working capital before significant revenue may be achieved. Management concluded disclosure controls were effective as of September 30, 2019 and reported no material change in internal control over financial reporting. The company said pending legal matters were not expected to materially affect its financial position, results, or cash flows. The cover page indicates “No” for having filed all required reports during the preceding 12 months.
Important facts for investors to verify
- Cash runway, near-term obligations, and whether subsequent financing was sufficient to address the disclosed going-concern uncertainty.
- The terms and full-ratchet consequences of the private placements, final share count, and resulting dilution.
- Whether the reported third-quarter profit is repeatable, given the $186,000 payable-settlement credit and zero reported SG&A.
- Customer retention, order trends, and receivable collections given the high revenue and receivables concentration.
- The company’s progress in transitioning from contract manufacturing to branded and white-label products, including the timing and capital required.
- The filing’s “No” response regarding required prior-period reports and any related reporting-compliance status.