NEXGEL, Inc. — Q3 2020 Form 10-Q
Business and period: The company manufactures hydrogel products, historically as a contract manufacturer, and says it is pursuing branded consumer products and white-label opportunities. This unaudited report covers the quarter and nine months ended September 30, 2020; comparative 2019 results include carve-out financial information for periods before the June 2019 spin-off. Dollar amounts below are in thousands unless stated otherwise.
Financial results and liquidity
- Q3 revenue: $242, down 16% from $287 in Q3 2019. Gross profit was $32 versus $74; gross margin fell to about 13% from 26%. Operating expenses were $567, compared with none reported in the prior-year quarter, and net loss was $545 versus net income of $74.
- Nine-month revenue: $573, up 6% from $541. Gross profit was $14 versus a gross loss of $100; gross margin was about 2.6% versus a gross loss margin of 18%. Operating expenses were $1,598 versus $1,511. Net loss narrowed slightly to $1,583 from $1,611.
- Cash flow: Operating cash use was $1,378 for the first nine months, compared with $1,427 in 2019. Investing cash use was $152, primarily equipment purchases. Financing provided $1,426, including $1,015 from stock issuance and $411 from notes payable. Cash declined from $261 at year-end 2019 to $157.
- Balance sheet: Current assets were $461 and current liabilities $939, a $479 working-capital deficit (versus $287 at December 31, 2019); the current ratio was approximately 0.49. Total assets were $2,204, total liabilities $1,830, and stockholders’ equity $374.
- Debt and leases: Notes payable totaled $411 ($147 current and $264 long-term). The company also reported operating lease liabilities of $834, including $207 current. The lease for its manufacturing and office facility runs through January 2026.
Material changes and notable items
- Management attributed the quarterly revenue decline to COVID-19, while stating that sales had begun returning to higher levels. Nine-month revenue growth was attributed to increased sales efforts with existing customers despite the pandemic. The filing also cites labor and supply shortages.
- Q3 SG&A rose substantially against a prior-year quarter in which costs were absorbed in connection with the spin-off. For the nine-month comparison, professional fees declined, while compensation, share-based compensation and depreciation increased.
- In May 2020, NexGel acquired Sport Defense LLC for $375 in common stock (9.375 million shares). Sport Defense markets hydrogel-based products for skin ailments. The CEO/CFO and a director were among the sellers; the filing describes an independent valuation and the director’s recusal from the board vote. The purchase-price allocation was preliminary.
- The company raised $620 through a February–March private placement and agreed to sell another 6.585 million shares for $395 in July–August; those latter shares had not been issued as of the filing date. A further 5.929 million shares were issued to the CEO in November upon vesting of restricted stock. Common shares outstanding were 88.965 million at September 30 and 94.894 million at November 16.
Outlook, risks and contingencies
- Going concern: Management expects continued losses and says additional capital is needed. It is evaluating equity offerings, but gives no assurance that funding will be available on acceptable terms. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- Borrowing: The company received a $147.3 PPP loan at 1% interest, potentially forgivable for qualifying uses; forgiveness was not assured. It also entered into an SBA EIDL loan agreement for up to $260.5, at 3.75%, with payments beginning in May 2021; the filing notes an $8 advance that need not be repaid.
- Concentration: Three customers represented 13%, 26% and 45% of nine-month 2020 revenue. Two represented 42% and 37% of accounts receivable at September 30.
- Other risks: The filing identifies pandemic-related uncertainty, limited capital, customer or supplier loss, competition, manufacturing and regulatory requirements, and execution risks in new products and acquisitions. No specific financial guidance is provided. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
- The filing marked “No” to having filed all required Exchange Act reports during the preceding 12 months. It reports no material pending legal proceedings, while noting ordinary-course claims and stating that their potential liability was not expected to materially affect results.
Most important facts for investors to verify
- Near-term cash needs, available financing, and the assumptions behind the going-concern assessment.
- Actual revenue recovery after Q3, gross-margin improvement, and the effects of COVID-related labor and supply constraints.
- Customer concentration and whether major customers maintain or change their purchasing levels.
- PPP forgiveness status, EIDL borrowing and repayment terms, and reconciliation of loan proceeds to reported debt balances.
- Final Sport Defense purchase accounting, performance after acquisition, and related-party transaction disclosures.
- Share issuance and dilution, including the subsequent CEO award and private-placement shares, and the filing’s reported delinquent-filing response.