NEXGEL, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
For the quarter and six months ended June 30, 2021. NexGel manufactures aqueous polymer hydrogels for medical, wound-care, diagnostic, drug-delivery and cosmetic uses. It is shifting from a primarily contract-manufacturing model toward proprietary consumer products, white-label manufacturing and medical devices.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $417,000 | $91,000 | $683,000 | $331,000 |
| Gross profit (loss) | $4,000 | $(85,000) | $(39,000) | $(18,000) |
| Operating expenses | $557,000 | $455,000 | $1.034 million | $1.031 million |
| Net loss | $(826,000) | $(530,000) | $(1.529 million) | $(1.038 million) |
| Operating cash used | Not reported by quarter | $(1.033 million) | $(980,000) |
- Gross margin was approximately 1% in Q2 and approximately negative 6% for the first half, versus negative 93% and negative 5%, respectively, in the comparable periods. Q2 gross profit improved from a prior-year loss, but first-half gross loss widened.
- Q2 net loss included $370,000 of interest expense, $52,000 of debt discount costs and $147,000 of PPP loan forgiveness income. First-half results also included $25,000 of debt-extinguishment loss.
- At June 30, cash was $382,000; current assets were $909,000 and current liabilities $1.770 million, resulting in an $860,000 working-capital deficit. Stockholders’ equity was $269,000.
- Financing provided $1.650 million in cash in the first half, including $1.337 million net proceeds from a secured convertible note, $285,000 from common-stock issuance and $128,000 from a second-draw PPP loan. Investing used $267,000, primarily for facility upgrades.
- The March 2021 Auctus note has $1.5 million principal, 12% annual interest and a $0.10 conversion price; its reported carrying amount at June 30 was approximately $511,000 after discounts and issuance costs. Other reported obligations include a $127,000 second PPP loan and an EIDL loan balance of approximately $271,000. The first PPP loan, approximately $147,000, was forgiven.
- Common shares outstanding increased from 99.3 million at December 31, 2020 to 104.3 million at June 30, 2021. The company also reported 19.8 million outstanding warrants at June 30.
Material changes versus prior period
- Revenue growth primarily reflected newly initiated consumer-product and finished-goods custom/white-label sales. First-half revenue included $379,000 contract manufacturing, $194,000 custom and white-label finished goods, and $110,000 NexGel-branded consumer products.
- Management attributed lower legacy revenue to customer supply-chain delays related to COVID-19 in 2020. Q2 production costs rose with increased materials and facility restart costs following a plant accelerator upgrade.
- Q2 SG&A increased $102,000, largely from professional and administrative fees, including costs preparing for a planned exchange listing. First-half SG&A was nearly flat year over year.
- The company extended its Langhorne facility lease by five years, through January 2031, increasing the recorded lease liability and right-of-use asset.
Outlook, risks and unusual items
- Management expects continued losses in the near term and says additional capital may be required. The filing states that substantial doubt exists about the company’s ability to continue as a going concern; access to sufficient financing and eventual profitability are uncertain.
- Management plans to grow contract manufacturing, develop consumer-product and white-label channels, and pursue proprietary products, including Nexdrape, a proposed surgical drape. The company intends to submit a 510(k) application to the FDA; approval is not assured. No quantified revenue, earnings or cash-flow guidance is provided.
- Customer concentration is significant: three customers generated 28%, 24% and 16% of first-half 2021 revenue. The filing also notes supplier concentration, COVID-related disruption, potential difficulty raising capital and other operating and regulatory risks.
- The Auctus note is secured and includes conversion and warrant features, listing and registration-related conditions, and default provisions. An August 13, 2021 amendment waived certain possible defaults; the filing does not clearly specify all amended terms in the provided text.
- The company reported effective disclosure controls at June 30, 2021 and no material changes in internal control over financial reporting. On the cover, it marked “No” for having filed all required reports during the preceding 12 months.
Key facts for investors to verify
- Whether NexGel can raise adequate capital and address the disclosed going-concern uncertainty, working-capital deficit and operating cash burn.
- The full current terms and compliance status of the Auctus note, including the August amendment, listing and registration requirements, collateral and potential share dilution.
- Whether new consumer and white-label sales can grow while the company improves manufacturing utilization and achieves positive gross margins.
- Customer and supplier concentration, receivable collection and the impact of any further COVID-related supply or demand disruption.
- FDA pathway, timing and costs for Nexdrape, and whether the planned exchange listing was achieved.