NexGel, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This filing reports annual results, not standalone fourth-quarter results. NexGel manufactures custom hydrogel materials for medical, wound-care, drug-delivery and cosmetic applications. It is shifting from primarily contract manufacturing toward proprietary consumer products and white-label opportunities. The 2019 comparative financial statements include pre-spin-off carve-out results, so they may not be fully comparable with 2020 standalone results.
Financial results and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $674,000 | $717,000 |
| Gross profit (loss) | ($291,000) | ($137,000) |
| Gross margin | (43%) | (19%) |
| SG&A | $1.969 million | $1.787 million |
| Operating loss | ($2.260 million) | ($1.924 million) |
| Net loss | ($2.264 million) | ($1.923 million) |
| Net cash used in operating activities | ($1.801 million) | ($1.814 million) |
Revenue declined about 6%. Gross loss widened despite lower revenue; management attributed cost pressure mainly to fixed overhead and compensation while the facility operated at approximately 10% capacity. SG&A rose, including higher compensation and share-based compensation, partly offset by lower professional fees. The audited statements report a 2019 gross loss of $137,000; an MD&A passage describing a 2019 gross profit appears inconsistent with those statements.
At year-end, cash was $32,000, total assets $2.257 million and total liabilities $2.186 million. Current assets were $363,000 and current liabilities $1.332 million, a working-capital deficit of approximately $970,000. The MD&A states current assets of $362,000; the filing does not clearly reconcile this small difference. Stockholders’ equity was $71,000. Operating cash outflow and equipment purchases of $312,000 were funded in part by $1.884 million of financing cash flow, including $1.370 million net equity proceeds, $414,000 of notes payable proceeds and $100,000 of convertible-note proceeds.
Year-end current liabilities included a $147,000 PPP loan, $59,000 of convertible notes, $10,000 current notes payable and $123,000 warrant liability. The balance sheet also shows $256,000 of notes payable due beyond one year and operating lease liabilities totaling $805,000. The company had no off-balance-sheet arrangements as described in the filing.
Material developments, outlook and risks
- Going concern: The auditor included an explanatory paragraph citing substantial doubt about NexGel’s ability to continue as a going concern. The company reported recurring losses, negative operating cash flow, minimal cash and a working-capital deficit, and expects near-term losses and may need further capital.
- Subsequent financing: In March 2021, NexGel received $1.337 million net proceeds from a $1.5 million senior secured convertible note bearing 12% annual interest, with a one-year maturity, conversion rights and warrants for up to 11 million shares. The note is secured by company assets and includes listing and registration-related default provisions. NexGel also sold $285,000 of stock and received a second PPP loan of $127,000 in March 2021.
- Strategy and demand: Management plans to maintain and grow contract manufacturing while developing consumer products and sales channels in cosmetics, athletic products and medical devices. It reported that sales had begun returning to higher levels early in 2021, without providing quantified guidance.
- Customer and supplier concentration: Three customers generated approximately 78% of 2020 revenue (45%, 22% and 11%); sales are purchase-order based, with no minimum-purchase contracts. Key polymer inputs rely on two principal manufacturers, and certain materials have sole suppliers.
- COVID-19: The company cited possible revenue declines, labor or supply disruptions, and difficulty raising capital; concentration increases exposure to a severe near-term impact.
- Acquisition and related parties: NexGel acquired Sport Defense LLC in May 2020 for $375,000 in stock. The seller group included the CEO/CFO and a director; the filing says an independent valuation supported the price and the director recused himself. The acquisition generated preliminary goodwill of $311,000. A $100,000 convertible note was issued to a director and an affiliated entity.
- Equity and governance: Shares outstanding increased from 57.5 million at year-end 2019 to 99.3 million at year-end 2020; the company authorized 3 billion common shares and expanded its equity plan reserve to 17 million shares. No public market existed as of the filing, and a planned reverse split had not been effected.
- Other disclosures: No R&D costs were recorded in 2020 or 2019. The company reported effective disclosure controls, but the auditor was not engaged to opine on internal-control effectiveness. No material litigation was reported.
Key facts for investors to verify
- Whether subsequent financing and any further capital raise provide sufficient liquidity, and the Auctus note’s conversion, security, default and dilution implications.
- Whether customers continue ordering, given that three customers accounted for 78% of revenue and orders are not contractually committed.
- Whether revenue recovery and the consumer-products strategy produce improved utilization, margins and cash generation; no quantified outlook was provided.
- The status and forgiveness of the PPP loans, repayment obligations on other debt, and the company’s ability to meet lease and debt payments.
- The final Sport Defense purchase-price allocation, related-party transaction terms, and the accuracy of reported current assets and 2019 gross-profit/loss disclosures.