NEXGEL, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Financial amounts below are in thousands of dollars, except per-share data and where noted. NexGel manufactures hydrogel materials and sells contract-manufactured, custom and white-label, and branded consumer products; medical devices are not yet marketed.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Revenue | $620 | $396 |
| Gross loss / gross margin | $(57) / (9.2%) | $(22) / (5.6%) |
| Operating expenses | $826 | $790 |
| Operating loss | $(883) | $(812) |
| Net loss attributable to NexGel stockholders | $(814); $(0.15) per share | $(1,836); $(0.33) per share |
| Net cash used in operating activities | $(709) | $(797) |
| Cash / marketable securities | $787 / $5,016 | $1,101 / $5,508 at Dec. 31, 2022 |
| Working capital | $5,758 | $6,646 at Dec. 31, 2022 |
| Total liabilities | $3,652 | $2,720 at Dec. 31, 2022 |
Revenue rose 56.6%. Contract manufacturing revenue was $380 (prior year $135), branded consumer products were $222 ($213), custom/white-label was $4, and other revenue was $14 ($48). Management attributed growth to contract manufacturing and branded-product sales, including $189 of revenue from CG Labs for March following the joint venture’s consolidation. Cost of revenue increased 62.0% to $677, and the gross loss widened; management cited higher manufacturing labor costs and fixed costs against increased volume.
Operating cash outflow improved by $88 year over year. Investing activities provided $397, including $485 of marketable-security sales and $88 of capital expenditures; financing activities used $2, primarily for note principal. Accounts payable rose to $987 from $265, while inventory increased to $968 from $502. The filing reports current assets of $7,280 and current liabilities of $1,522 at quarter-end.
Debt included approximately $281 of EIDL principal and accrued interest, with $15 classified current and $266 long-term. Operating lease liabilities totaled $2,096, including $232 current; the lease runs through January 2031, subject to renewal options. No cash interest or income taxes were paid during the quarter.
Material changes and notable items
- Other income was $76 versus other expense of $1,024 in Q1 2022. The prior-year comparison included $744 of net interest expense, $150 of debt-extinguishment loss, and $130 of warrant-related expense; Q1 2023 included a $66 benefit from changes in warrant fair value and modification expense.
- On March 1, NexGel formed CG Converting and Packaging, LLC with CG Labs, each owning 50%. NexGel consolidated the JV as a variable interest entity. NexGel committed $500 for upgrades and general purposes; the note says $100 had been contributed by March 31. The balance sheet reports $507 of non-controlling interest.
- On March 21, NexGel entered a services agreement with Haleon to supply material for a consumer product under development. The filing cautions that a product may not be released or successful.
- At March 31, 5,614,028 common shares were outstanding. The company also reported 3,557,190 outstanding warrants, 542,469 options, and 121,787 restricted stock units. The board approved an increase of 300,000 shares reserved under the 2019 incentive plan.
Outlook, risks and controls
Management stated it believes cash and marketable securities are sufficient to operate its business plan through 2025, but expects near-term losses to continue. It plans to grow contract manufacturing, develop branded and white-label products, pursue adjacent markets including cosmetics and athletic products, explore medical devices and drug delivery, and evaluate strategic initiatives. Additional debt or equity financing may be needed; management cautioned that financing may not be available on acceptable terms. Long-term viability depends on growing products and achieving profitability.
Key disclosed risks include customer or supplier concentration, competition, regulation and manufacturing compliance, supply-cost increases, technology obsolescence, product-development challenges, capital needs, and dependence on key personnel. Three customers generated 52%, 21%, and 13% of Q1 revenue. Management reported no known material legal proceedings, no defaults on senior securities, and effective disclosure controls at March 31, 2023. No material changes in internal control over financial reporting were reported.
Investor verification points
- Reconcile the JV funding disclosures: the cash-flow statement lists $500 of property and equipment contributed to the JV, while the JV note says NexGel had contributed $100 of its $500 commitment by March 31.
- Confirm the sustainability and quality of revenue growth, especially the contribution from the newly consolidated JV, and whether gross margins can improve.
- Assess cash runway against the reported operating cash burn, expected continuing losses, planned spending, and potential financing needs.
- Review customer concentration and collectability; the three largest customers represented 86% of Q1 revenue.
- Evaluate potential dilution from outstanding warrants, options, restricted stock units, and the expanded equity incentive plan.
- Note that the statements report net loss of $807 before the $7 income attributable to the JV’s non-controlling interest, resulting in $814 net loss attributable to NexGel stockholders; verify presentation when comparing measures.