NexGel, Inc. — Form 10-Q Summary
Period: Quarter and nine months ended September 30, 2021. Financial amounts are in thousands of dollars unless otherwise noted. NexGel manufactures hydrogel products for contract customers and is expanding into custom/white-label and branded consumer products. The filing is unaudited. The company checked “No” when asked whether it had filed all required reports during the preceding 12 months; investors should verify the filing history and any implications.
Financial results and condition
- Revenue: Third-quarter revenue was $335, up 38% from $242. Nine-month revenue was $1,018, up 78% from $573. Nine-month sales included $559 contract manufacturing, $194 custom/white-label finished goods, and $265 branded consumer products.
- Gross profit and margins: Third-quarter gross loss was $57, or approximately negative 17% of revenue, versus a $27 gross loss (approximately negative 11%) in 2020. Nine-month gross loss narrowed to $95, approximately negative 9%, from $153, approximately negative 27%.
- Operating results: Third-quarter operating loss was $610 and net loss was $1,142, versus losses of $535 and $545, respectively, in 2020. Nine-month operating loss was $1,683 and net loss was $2,671, versus $1,584 and $1,583. Nine-month interest expense rose to $1,052 from $5, principally reflecting financing-related costs. Basic and diluted loss per share was $0.01 for the quarter and $0.03 for the nine months.
- Cash flow: Operating cash use was $1,556 for the first nine months, compared with $1,378 in 2020; investing cash use was $390, mainly facility upgrades. Financing provided $3,169, including convertible-note proceeds. Cash increased to $1,255 from $32 at December 31, 2020.
- Liquidity and debt: Current assets were $1,810 and current liabilities $2,409, leaving a $599 working-capital deficit. Total liabilities were $4,457 and stockholders’ equity $484. Current liabilities included $1,162 of convertible notes, $127 of PPP debt, and $316 of warrant liability; long-term liabilities included $267 of notes payable and $1,781 of lease liability. The filing reports the EIDL loan balance, including accrued interest, as approximately $274.
Changes and management commentary
- Revenue growth reflected new branded consumer and custom/white-label sales. Management said legacy customer revenue was affected by COVID-related supply-chain and packaging delays.
- Quarterly gross loss widened, which management attributed mainly to supplemental staffing and plant restart costs after an accelerator upgrade. For the nine-month period, gross loss narrowed, with management citing higher contract-manufacturing volume and lower manufacturing labor costs. Management expects higher facility utilization to support margins, but provides no quantified forecast.
- SG&A rose to $553 for the quarter and $1,588 for the nine months. The filing cites higher professional and administrative costs, including preparation for a planned exchange listing.
- Management plans to grow contract manufacturing, build the consumer-product catalog, and develop sales channels and branded products. It expects continued losses and says further capital may be needed; no revenue, earnings, or cash-flow guidance is provided.
Financing, risks, and unusual items
- Going concern: Management states that substantial doubt exists about the company’s ability to continue as a going concern, citing the nine-month net loss, operating cash use, working-capital deficit, expected continuing losses, and need to raise capital. The financial statements contain no adjustments for a possible failure to continue as a going concern.
- Convertible financing and dilution: The March Auctus financing and September private placement carried 12% interest, conversion rights, warrants, and security interests in company assets. The notes include default provisions and restrictions on certain future financings. The September investors’ security is subordinated to Auctus. Outstanding warrants totaled 31.4 million shares and options totaled 15.7 million at quarter-end; actual dilution depends on conversion and exercise.
- Customer concentration: Three customers accounted for 33%, 38%, and 24% of revenue for the reported nine-month period, respectively. The filing also identifies significant customer concentration in receivables and dependence on a supplier.
- Other items: The initial $147,300 PPP loan was forgiven in June 2021; the second PPP loan remained outstanding. The company extended its facility lease through January 2031. Subsequent to quarter-end, Auctus and NexGel amended their financing agreement, and NexGel entered into a CEO employment agreement effective only upon a qualifying exchange listing.
- Controls and legal matters: Management concluded disclosure controls were effective at a reasonable level of assurance and reported no material quarterly change in internal control over financial reporting. The company said ordinary-course legal claims were not expected to materially affect its financial position, results, or cash flows.
Important facts for investors to verify
- Near-term cash needs, the company’s ability to raise additional capital, and the assumptions supporting the going-concern disclosure.
- Convertible-note balances, maturity and default terms, amendments, collateral priority, and any registration or listing requirements.
- Customer and supplier concentration, customer retention, and whether new branded and white-label sales can improve gross margins.
- Potential dilution from convertible notes, warrants, options, and other equity awards.
- The status of any planned exchange listing and the company’s report-filing history, given its “No” response to the filing-compliance question.