NEXGEL, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unless stated otherwise, financial figures are in thousands of dollars. NEXGEL manufactures hydrogel materials and is expanding from contract manufacturing into branded consumer products, custom/white-label products, medical devices and drug-delivery development.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $568 | $335 | $1,524 | $1,018 |
| Gross profit (loss) | $148 | $(57) | $220 | $(95) |
| Gross margin | Approximately 26% | Approximately (17)% | Approximately 14.4% | Approximately (9.3)% |
| Operating expenses | $1,185 | $553 | $2,787 | $1,588 |
| Operating loss | $(1,037) | $(610) | $(2,567) | $(1,683) |
| Net loss | $(1,227) | $(1,142) | $(4,098) | $(2,671) |
| Net loss per share, diluted | $(0.22) | $(0.38) | $(0.74) | $(0.91) |
- Revenue and margins: Revenue rose 69.6% in Q3 and 49.7% year to date. The company attributed growth to branded consumer products, contract manufacturing and new products. Gross profit turned positive in both comparisons, which management attributed mainly to higher production volume absorbing fixed costs.
- Expenses and losses: Q3 SG&A increased 79.4% to $992; nine-month SG&A increased 56.5% to $2,459. Research and development was $193 in Q3 and $328 year to date, primarily for two drug-delivery proof-of-concept studies and development of the NEXDrape medical device. Higher expenses contributed to larger operating and net losses.
- Cash flow: Nine-month cash used in operations was $2,343, versus $1,556 in 2021. Investing activities used $6,068, principally reflecting purchases of marketable securities, net of sales. Financing activities used $3,512, primarily for repayment of notes.
- Liquidity: At September 30, cash and cash equivalents were $1,427 and marketable securities were $5,985, for combined cash and securities of about $7.4 million. Working capital was $7.2 million, down from $11.0 million at year-end 2021. Current assets were $8,315 and current liabilities $1,115.
- Debt and obligations: Convertible notes were fully repaid during 2022. Notes payable totaled approximately $283, principally the EIDL loan; the balance sheet shows $14 current and $269 long term. Operating lease liabilities totaled $1,839, with the facility lease running through January 2031.
- Equity and potential dilution: Common shares outstanding were 5,572,234 at September 30 and November 8, 2022. The filing also reports 3,637,190 warrants outstanding, 329,937 options and 96,114 restricted stock awards/units outstanding.
Material changes and unusual items
- The company used cash to retire convertible financing: the Auctus note was repaid in March and the remaining September 2021 notes were repaid in September. The repayments reduced debt but contributed to the decline in working capital.
- Q3 SG&A included an unusually high $220 franchise-tax charge attributed to the IPO and increased gross assets. Following a reduction in authorized shares at the August 2022 annual meeting, management estimated the 2023 franchise-tax liability at approximately $28, assuming a similar asset base.
- The company extended certain warrants by six months in September, recording $57 of warrant modification expense. The warrant liability was $372 at quarter-end.
- Revenue is concentrated: two customers accounted for 39% and 27% of nine-month 2022 revenue. Two customers represented 6% and 53% of receivables at September 30.
Outlook, risks and other disclosures
- Management believes cash and marketable securities are sufficient to fund its business plan through 2024, while also stating that near-term losses are expected to continue. Long-term viability depends on growing the business and achieving profitability; additional debt or equity financing may be needed, and availability and terms are not assured.
- Plans include growing contract manufacturing, expanding branded and white-label consumer products and sales channels, developing proprietary medical devices, and exploring drug-delivery programs. Management anticipates further gross-margin improvement from increased revenue against fixed facility costs and larger production runs; this is an expectation, not a guarantee.
- Risks highlighted include funding and going-concern uncertainty, customer or supplier loss, competition, regulation and manufacturing compliance, product or technical problems, price increases, technology obsolescence and execution risks from acquisitions and growth plans.
- The company reported no material litigation, no material change to previously disclosed risk factors, and no off-balance-sheet arrangements. Management concluded disclosure controls were effective at a reasonable level of assurance.
Important facts for investors to verify
- Whether revenue growth and improved gross margins persist, particularly as the product mix and production volumes change.
- Cash burn, the composition and maturity of marketable securities, and whether management’s estimate of funding through 2024 remains supportable.
- Customer concentration and the collectability of receivables, including the customer representing 53% of quarter-end receivables.
- The economics and commercialization progress of branded products, drug-delivery studies and the NEXDrape device, including related R&D spending.
- Potential share dilution from outstanding warrants, options and restricted stock awards/units, and any further capital-raising needs.
- The actual 2023 franchise-tax liability and any material change in debt, lease obligations or other contingencies.