NEXGEL, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited results are compared with the corresponding 2022 periods. Amounts below are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Business context
NEXGEL manufactures hydrogel materials for wound care, diagnostics, drug delivery and cosmetics. Its activities include contract manufacturing, custom and white-label goods, branded consumer products, and planned medical devices. On March 1, 2023, NEXGEL acquired a 50% interest in CG Converting and Packaging, LLC and consolidates the venture as a variable interest entity; CG Labs holds the other 50%.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1,167 | $561 | $1,786 | $956 |
| Gross profit / margin | $175 / 15% | $101 / 18% | $117 / 7% | $72 / 8% |
| Operating expenses | $937 | $819 | $1,763 | $1,602 |
| Operating loss | $(762) | $(718) | $(1,646) | $(1,530) |
| Net loss | $(642) | $(1,035) | $(1,449) | $(2,871) |
| Net loss attributable to NEXGEL stockholders | $(695) | $(1,035) | $(1,509) | $(2,871) |
| Basic and diluted loss per share | $(0.12) | $(0.19) | $(0.27) | $(0.52) |
- Revenue increased 108.0% in Q2 and 86.8% year to date. Management attributed growth to contract manufacturing and branded products, including $602 in Q2 and $792 year-to-date of CG Labs revenue for the period stated in the filing.
- Despite higher gross profit dollars, gross margins declined year over year in both periods. Management cited increased materials, production costs, promotional materials, samples and marketing support for product launches.
- Q2 net loss improved mainly alongside lower interest expense and gains on investments; first-half results included $124 of investment gains and a $77 favorable change in warrant-liability fair value. The 2022 comparison included substantial interest expense and a $150 debt-extinguishment loss.
- At June 30, cash was $3,691 and marketable securities were $612, compared with $1,101 and $5,508, respectively, at year-end 2022. Current assets were $6,698 and current liabilities $1,672, producing working capital of $5,026, versus $6,646 at December 31, 2022.
- Six-month operating cash use was $1,926, versus $1,495 in 2022. Investing activities provided $4,519, primarily from $4,772 of marketable-security sales, offset partly by $253 of capital expenditures. Financing cash use was $3. Cash increased by $2,590 for the period, principally because securities were converted to cash.
- Notes payable were $280, largely the SBA EIDL loan; the current portion was $15. Operating lease liabilities totaled $2,051, including current and noncurrent amounts. The balance sheet also reported a $165 warrant liability.
- Total assets were $10,497 and total stockholders’ equity was $6,741 at June 30. Common shares outstanding were 5,696,064; the filing also reports 3,442,904 warrants, 528,182 options and 121,787 restricted stock units outstanding.
Changes, outlook and risks
- SG&A rose 24.6% in Q2 and 14.5% year to date, with higher compensation, advertising and marketing, and professional fees among the drivers. R&D declined year to date after completion of two drug-delivery proof-of-concept studies.
- The company says its cash and marketable securities are sufficient to support its business plan through 2025, but expects near-term losses. It identifies profitable operations as necessary for long-term viability and says additional debt or equity financing may be needed; there is no assurance financing will be available on acceptable terms.
- Management plans to grow contract manufacturing, develop branded and white-label products, pursue adjacent markets including cosmetics and athletic products, and explore medical devices, drug delivery and strategic initiatives. The filing provides no quantified revenue or earnings guidance.
- A March 2023 services agreement with Haleon covers material for a consumer product to be developed and potentially released; the company cautions that release and commercial success are not assured. In July 2023, NEXGEL announced a strategic relationship with Enigma Health for North American retail distribution and marketing.
- Revenue and receivables are concentrated among a small number of customers. Two customers represented 40% and 14% of first-half 2023 revenue. The filing also notes that cash balances exceeded FDIC insurance limits by approximately $3 million.
- Management reported no known material litigation, no off-balance-sheet arrangements of the specified types, and effective disclosure controls at June 30, 2023. The filing identifies risks including financing needs, customer or supplier loss, competition, regulation, manufacturing compliance, and technology or equipment obsolescence.
Important facts for investors to verify
- Whether the claimed liquidity runway through 2025 is supported by actual cash-burn trends, planned investment and any expected financing.
- How much reported revenue growth is recurring and attributable to legacy NEXGEL operations versus the consolidated CG Labs venture, and the venture’s profitability and cash requirements.
- Customer concentration, renewal or order visibility, and collection timing, given the disclosed concentration in revenue and receivables.
- The commercial status and expected economics of the Haleon opportunity, Enigma Health relationship, branded-product launches and prospective medical-device programs.
- Potential dilution from outstanding warrants, options and restricted stock units, as well as the warrant liability’s valuation assumptions.