UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended:
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
Commission
file number:
(Exact name of registrant as specified in its charter)
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| incorporation or organization) | Identification Number) |
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Registrant’s
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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| The
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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller
reporting company |
Emerging
growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No
As of November 13, 2024, the registrant had shares of common stock outstanding.
nEXGEL, INC.
TABLE OF CONTENTS
| 2 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEXGEL, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2024 AND DECEMBER 31, 2023
(Unaudited)
(in thousands, except share and per share data)
| September 30, 2024 | December 31, 2023 | |||||||
| ASSETS: | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Goodwill | ||||||||
| Intangibles, net | ||||||||
| Property and equipment, net | ||||||||
| Operating lease - right of use asset | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Deferred revenue | ||||||||
| Current portion of note payable | ||||||||
| Warrant liability | ||||||||
| Contingent consideration liability | ||||||||
| Financing lease liability, current portion | ||||||||
| Operating lease liabilities, current portion | ||||||||
| Total current liabilities | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Financing lease liability, net of current portion | ||||||||
| Notes payable, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (Note 16) | ||||||||
| Preferred stock, par value $ per share, shares authorized, shares issued and outstanding | ||||||||
| Common stock, par value $ per share, shares authorized; and shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total NexGel stockholders’ equity | ||||||||
| Non-controlling interest in joint venture | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
NEXGEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
(Unaudited)
(in thousands, except share and per share data)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Research and development | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||||||
| Other income | ||||||||||||||||
| Gain on investments | ||||||||||||||||
| Changes in fair value of warrant liability | ||||||||||||||||
| Total other income, net | ||||||||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Less: Loss (income) attributable to non-controlling interest in joint venture | ( | ) | ||||||||||||||
| Net loss attributable to NexGel stockholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss per common share - basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per common share - diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares used in computing net loss per common share - basic | ||||||||||||||||
| Weighted average shares used in computing net loss per common share – diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
NEXGEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
(Unaudited)
(in thousands, except share data)
| Common Stock | Additional Paid-in | Non- controlling | Accumulated | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Interest | Deficit | Equity | |||||||||||||||||||
| Balance, January 1, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Share-based compensation and restricted stock vesting | ||||||||||||||||||||||||
| Equity offering proceeds, net of expenses | ||||||||||||||||||||||||
| Issuance of placement agent warrants in conjunction with the equity offering | — | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Share-based compensation and restricted stock vesting | ||||||||||||||||||||||||
| Shares issued in acquisition | ||||||||||||||||||||||||
| Issuance of shares for services | ||||||||||||||||||||||||
| Non-controlling interest contribution | — | |||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Share-based compensation and restricted stock vesting | ||||||||||||||||||||||||
| Equity offering proceeds, net of expenses | ||||||||||||||||||||||||
| Issuance of placement agent warrants in conjunction with the equity offering | — | |||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
NEXGEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023
(Unaudited)
(in thousands, except share data)
| Common Stock | Additional Paid-in | Non- controlling | Accumulated | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Interest | Deficit | Equity | |||||||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Restricted stock vesting | ||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||
| Non-controlling interest in JV | - | |||||||||||||||||||||||
| Net income (loss) | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||
| Net income (loss) | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||
| Net income (loss) | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
NEXGEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
(Unaudited)
(in thousands)
Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Income (loss) attributable to non-controlling interest in joint venture | ( | ) | ||||||
| Depreciation and amortization | ||||||||
| Changes in ROU asset and operating lease liability | ||||||||
| Share-based compensation and restricted stock vesting | ||||||||
| Gain on investment in marketable securities | ( | ) | ||||||
| Changes in fair value of warrant liability | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Accrued expenses and other current liabilities | ( | ) | ( | ) | ||||
| Deferred revenue | ||||||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Investing Activities | ||||||||
| Proceeds from sales of marketable securities | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Net cash paid for Asset acquisition | ( | ) | ||||||
| Net Cash (Used in) Provided by Investing Activities | ( | ) | ||||||
| Financing Activities | ||||||||
| Proceeds from margin line of credit | ||||||||
| Proceeds from Rights offering | ||||||||
| Investment by joint venture partner | ||||||||
| Principal payment on financing lease liability | ( | ) | ||||||
| Change in contingent consideration liability | ( | ) | ||||||
| Principal payments of notes payable | ( | ) | ( | ) | ||||
| Net Cash Provided by Financing Activities | ||||||||
| Net Decrease in Cash | ( | ) | ||||||
| Cash – Beginning of period | ||||||||
| Cash – End of period | $ | $ | ||||||
| Supplemental Disclosure of Cash Flows Information | ||||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | $ | ||||||
| Taxes | $ | $ | ||||||
| Supplemental Non-cash Investing and Financing activities | ||||||||
| Shares issued in conjunction with asset acquisition | $ | $ | ||||||
| Property and equipment financed under notes payable | $ | $ | ||||||
| Property and equipment financed under financing leases | $ | $ | ||||||
| Property and equipment contributed as capital investment to JV | $ | $ | ||||||
| ROU asset and operating lease liabilities recognized upon consolidation of JV | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 7 |
NEXGEL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. Description of Business, Stock Split and Basis of Presentation
NexGel, Inc. (“NexGel” or the “Company”) manufactures high water content, electron beam cross-linked, aqueous polymer hydrogels, or gels, used for wound care, medical diagnostics, transdermal drug delivery and cosmetics. The Company specializes in custom gels by capitalizing on proprietary manufacturing technologies. The Company has historically served as a contract manufacturer, supplying our gels to third parties who incorporate them into their own products. Beginning in 2020, we created two new lines of business for the Company. First, we launched our own line of branded consumer products sold direct to consumers. Second, we expanded into custom and white label opportunities, which focuses on combining our gels with proprietary branded products and white label opportunities. All of our gel products are manufactured using proprietary and non-proprietary mixing, coating and cross-linking technologies. Together, these technologies enable us to produce gels that can satisfy rigid tolerance specifications with respect to a wide range of physical characteristics (e.g., thickness, water content, adherence, absorption, moisture vapor transmission rate [a measure of the passage of water vapor through a substance] and release rate) while maintaining product integrity. Additionally, we have the manufacturing ability to offer broad choices in the selection of liners onto which the gels are coated. Consequently, the Company and its customers are able to determine tolerances in moisture vapor transmission rate and active ingredient release rates while personalizing color and texture.
NexGel was previously known as AquaMed Technologies, Inc. (“AquaMed”) before changing its name to NexGel, Inc. on November 14, 2019.
On May 15, 2024, the Company purchased substantially all of the assets from Semmens Online Pty Ltd as Trustee for Semmens Business Trust (the “SG Seller”) related to the SG Seller’s eyeliner, fake eyelashes, lash serum and mascara business operating under the tradename “Silly George” (collectively, the “Silly George Business”).
On December 1, 2023, the Company purchased substantially all of the assets Olympus Trading Company, LLC (the “Kenkoderm Seller”) related to the Kenkoderm Seller’s skincare line focused on reducing symptoms associated with psoriasis operating under the tradename “Kenkoderm” (“Kenkoderm acquisition”).
On
March 1, 2023, the Company acquired a
On
January 6, 2023, the Company acquired a
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and footnotes of NexGel have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results of the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2024. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Principles of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of the Company and its condensed consolidated wholly-owned
subsidiary, NexGelRx, Inc. and the fifty percent (
2. Going Concern
As
of September 30, 2024, the Company had a cash balance of $
| 8 |
On
November 11, 2024, the Company entered into subscription agreements with investors and certain members of its board of directors
and management for the sale by the Company of an aggregate of units at a price to the public of $
per unit, with each unit consisting of two shares of the Company’s common stock, and a warrant to purchase one share of common
stock at an exercise price of $
Management is exploring new product channel sales in adjacent industries, such as cosmetics, athletic products, and proprietary medical devices. The Company has increased focus on sales and developing a sales pipeline for potential customers. This customer base expansion will enable us to provide financial stability for the foreseeable future, expand our current processes, and position us for long-term shareholder value creation.
We intend to maintain and attempt to grow our existing contract manufacturing business. We also plan to continue building and developing our catalogue of consumer products for sale to branding partners and to use our in-house capabilities to create and test market additional branded products. These products will be target marketed and sold online through social media and online advertising and marketplaces. Furthermore, the Company plans to develop its own proprietary medical devices and explore drug delivery programs for its technology. Additionally, the Company continues to evaluate strategic initiatives (e.g., acquisitions) and additional capital raises through debt or equity may be necessary to achieve these objectives.
We expect to continue incurring losses for the near-term future. Our ability to continue to operate as a going concern in the long-term is dependent upon our ability to manage and grow our current products and to ultimately achieve profitable operations. Management may consider various options to raise capital to fund potential acquisitions through equity or debt offerings. There can be no assurances, however, that management will be able to obtain sufficient additional funds, if needed, or that such funds, if available, will be obtained on terms satisfactory to us. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and liabilities that might be necessary should we be unable to continue as a going concern. Additionally, it is reasonably possible that estimates made in the condensed consolidated financial statements have been, or will be, materially and adversely impacted in the near term as a result of these conditions, including the recoverability of long-lived assets.
3. Significant Accounting Policies and Estimates
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. These estimates and assumptions include allowances for credit losses, inventory reserves, deferred taxes, share-based compensation and related valuation allowances and fair value of long-lived assets. Actual results could differ from the estimates.
Reclassifications
We have reclassified, combined or separately disclosed certain amounts in the prior years’ consolidated financial statements and accompanying footnotes to conform with the current year’s presentation.
Segment Reporting
The Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 280, Segment Reporting, requires that an enterprise report selected information about reportable segments in its financial reports issued to its stockholders. The Company has two reportable segments - the NexGel segment and the “CGN” segment.
The NexGel segment is comprised of the manufacturing of ultra-gentle, high-water-content hydrogel products for healthcare and consumer applications, which is based in Langhorne, Pennsylvania. The NexGel segment includes the Kenkoderm and Silly George recent acquisitions and the Enigma JV.
| 9 |
The “CGN” segment is comprised of the CGN JV used for the Company’s converting and packaging business, which is based in Granbury, Texas.
Cash and cash equivalents
Cash and cash equivalents is comprised of cash in banks and highly liquid investments, including U.S. treasury bills purchased with an original maturity of three months or less as well as investments in money market funds for which the carrying amount approximates fair value, due to the short maturities of these investments.
Margin Line of Credit
The
Company has a brokerage account through which it can buy and sell U.S. treasury bills. The provisions of the account allow us to borrow
on certain securities held in the account and to purchase additional securities based on the account equity (including cash). Amounts
borrowed are collateralized by the securities held in the account and bear interest at a negotiated rate payable monthly. Securities
pledged to secure margin balances cannot be specifically identified as a portion of all securities held in a brokerage account are used
as collateral. As of September 30, 2024 and December 31, 2023, there was $
Accounts Receivable, net
Trade
accounts receivable are stated at the amount the Company expects to collect and do not bear interest. The Company evaluates the collectability
of accounts receivable and records a provision to the allowance for credit losses based on factors including the length of time the receivables
are past due, the customer’s payment history, the credit quality of the customer and other factors that may affect the customers’
ability to pay. Provisions to the allowances for doubtful accounts are recorded in selling, general and administrative expenses. Account
balances are charged off against the allowance when it is probable that the receivable will not be recovered. The allowance for credit
losses was $
Inventory and Cost of Revenues
The inventory balance is stated at the lower of cost, the value determined by the first-in, first-out method, or net realizable value. The Company evaluates inventories for excess quantities, obsolescence, and shelf-life expiration. This evaluation includes an analysis of historical sales levels by product, projections of future demand, the risk of technological or competitive obsolescence for products, general market conditions, and a review of the shelf-life expiration dates for products. These factors determine when, and if, the Company adjusts the carrying value of inventory to estimated net realizable value.
The Company produces proprietary branded products and white label opportunities in our manufacturing of consumer products. In our contract manufacturing, the Company builds its products based on customer orders and immediately ships the products upon completion of the production process.
The inventory balance is made up of raw materials, work-in-progress, and finished goods. Inventory is maintained at the Company’s warehouses and at fulfilment centers owned by Amazon, Walmart and CVS.
The “Cost of revenues” line item in the condensed consolidated statements of operations is comprised of the book value of inventory sold to customers during the reporting period. When circumstances dictate that we use net realizable value as the basis for recording inventory, we base our estimates on expected future selling prices less expected disposal costs.
Research and Development
Our research and development activities focus on new and innovative products designed to support revenue growth. Research and development expenses consist primarily of contracted development and testing efforts associated with development of products.
| 10 |
Property and Equipment, net
Property and equipment is recorded at historical cost, net of accumulated depreciation and amortization. Depreciation is provided over the assets’ useful lives on a straight-line basis. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or lease terms. Repairs and maintenance costs are expensed as incurred.
Management periodically assesses the estimated useful life over which assets are depreciated or amortized. If the analysis warrants a change in the estimated useful life of property and equipment, management will reduce the estimated useful life and depreciate or amortize the carrying value prospectively over the shorter remaining useful life.
The carrying amounts of assets sold or retired and the related accumulated depreciation are eliminated in the year of disposal and any resulting gains and losses are included in the results of operations during the same year.
Impairment of Long-Lived Assets
The Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Goodwill and Intangible Assets
In applying the acquisition method of accounting, amounts assigned to identifiable assets and liabilities acquired were based on estimated fair values as of the date of acquisition, with the remainder recorded as goodwill. Identifiable intangible assets are initially recorded at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Identifiable intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. Intangible assets with indefinite lives are tested for impairment within one year of the acquisition date or annually as of December 31, and whenever indicators of impairment exist. The fair value of intangible assets is compared with their carrying values, and an impairment loss would be recognized for the amount by which a carrying amount exceeds its fair value.
The
Company performed the annual assessment and concluded it is more likely than not that the fair value exceeds the carrying value and
Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets are recorded at historical cost and are primarily made up of $
Other Assets
Other assets are recorded at historical costs, and as of September 30, 2024 and December 31, 2023, the balance is primarily comprised of spare parts for manufacturing equipment. The Company maintains spare for either repair and maintenance, which is expensed as incurred, or replacement of capitalized equipment. Capitalized equipment spare parts are not subject to depreciation until such time that they are placed into service and the part that is being replaced is disposed.
| 11 |
Fair Value Measurements
The Company utilizes the fair value hierarchy to apply fair value measurements. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair values that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. The basis for fair value measurements for each level within the hierarchy is described below:
Level 1 —Quoted prices for identical assets or liabilities in active markets.
Level 2 —Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 —Valuations derived from valuation techniques in which one or more significant inputs to the valuation model are unobservable.
The Company considers the carrying amounts of its financial instruments (cash, accounts receivable and accounts payable, notes payable and convertible notes payable) in the condensed consolidated balance sheet to approximate fair value because of the short-term or highly liquid nature of these financial instruments.
Warrant Liability
Warrants to purchase common stock were issued in connection with equity financing raises, which occurred during 2019 through 2024. The fair values of the warrants are estimated as of the date of issuance and again at each reporting period using a Black-Scholes option valuation model. At issuance, the fair values of the warrant are recognized as an equity issuance cost within additional paid-in-capital. Fair value adjustments to the warrant liability are recognized in other income (expense) in the condensed consolidated statements of operations.
Equity Classified Warrants
Warrants that meet all necessary criteria to be accounted for as equity in accordance with ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity are presented within additional paid-in capital within Company’s condensed consolidated statements of changes in stockholders’ equity and condensed consolidated balance sheets. Warrants classified as equity are initially measured at fair value. Subsequent changes in fair value are not recognized as long as the warrants continue to be classified as equity.
Revenue Recognition
The Company records revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
The Company currently recognizes revenue predominately from three sources, contract manufacturing, custom and white label finished goods manufacturing (“Custom and white label”), and our branded consumer products. Contract manufacturing and Custom and white label revenues are recognized at the point where the customer obtains control of the goods and the Company satisfies its performance obligation, which generally is at the time the customer receives the product. Branded consumer product revenue is derived from direct-to-consumer purchases through websites like Amazon and through our Shopify stores. Revenue is recognized upon shipment to the end customer.
The Company’s customers consist of other life sciences companies and Amazon retail customers. Revenues are predominately concentrated in the United States, but with the Silly George acquisition, have expanded into Europe and Asia. Payment terms, excluding branded consumer products, vary by the type and location of customer and may differ by jurisdiction and customer but payment is generally required in a term ranging from 30 to 60 days from date of shipment. Branded consumer products are purchased and paid for by the consumer at the time the transaction is completed.
Estimates for product returns, allowances and discounts are recorded as a reduction of revenue and are established at the time of sale. Returns are estimated through a comparison of historical return data and are determined for each product and adjusted for known or expected changes in the marketplace specific to each product, when appropriate. Historically, sales return provisions have not been material. Amounts accrued for sales allowances and discounts are based on estimates of amounts that are expected to be claimed on the related sales and are based on historical data. Payments for allowances and discounts have historically been immaterial.
| 12 |
Disaggregated revenue by sales type ($ in thousands):
| Three months ended | ||||||||
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Contract manufacturing | $ | $ | ||||||
| Custom and white label | ||||||||
| Branded consumer products | ||||||||
| Medical devices/other | ||||||||
| Total | $ | $ | ||||||
| Nine months ended | ||||||||
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Contract manufacturing | $ | $ | ||||||
| Custom and white label | ||||||||
| Branded consumer products | ||||||||
| Medical devices/other | ||||||||
| Total | $ | $ | ||||||
As
of September 30, 2024 and December 31, 2023, the Company did not have any contract assets or contract liabilities from contracts with
customers and there were
The Company has four distinct lines of business; Contract Manufacturing, Custom and White Label, Branded Consumer Products, and Medical Devices/Other.
Contract Manufacturing
Customers order rolls of gel (“rollstock”). The rollstock is shipped to our customers, which they package into finished goods. Historically, this has been the Company’s primary source of revenue.
Custom and White Label
These products often infuse various ingredients into our base gel to develop unique product offerings to satisfy market demand (e.g. aloe infused into the gel for a beauty mask). The rollstock is converted and packaged into saleable units. The finished goods are shipped to the customer, who is ultimately responsible for product distribution. Frequently these products started as development deals, in which the customer paid the Company a small fee to develop a specific product. Once completed, the customer places a large order for newly developed product. Custom and white label revenue is recognized upon delivery of the finished product.
Branded Consumer Products
These products are finished goods marketed and sold directly to the customer by the Company through online and retail channels. The Company is responsible for sales, marketing, and distribution. When merchandise is shipped to a customer, our performance obligation is met, and revenue is recognized when control passes to the customer. These products carry the Company’s brand names, which include Medagel, Lumagel Beauty, Kenkoderm and Silly George.
Medical Devices/Other
Medical Devices are a hybrid business, combining elements of Custom and White Label and Branded Consumer Products. Medical Devices, which are not yet marketed, are expected to be distributed through strategic partnerships. The Company will manufacture and possibly convert/package the device while the strategic partner brings the product to market. Small market Medical Devices could be launched by the Company, but also be offered to a distributor to reach the full scale of the market.
Other includes shipping and handling revenue from customers who purchase the Company’s branded consumer products through their Shopify stores. It also includes a small amount of freight revenue from contract manufacturing customers.
Shipping and Handling Revenue and Expense
Shipping and handling revenue and expense are included in our condensed consolidated statements of operations in revenues and cost of revenues, respectively. The Company accounts for shipping activities, consisting of direct costs to ship products performed after the control passes to the customer. Shipping revenue and expense are primarily generated through the Amazon marketplace and Silly George direct customer sales.
On August 28, 2019, the Company adopted the 2019 Long-Term Incentive Plan, as amended (the “2019 Plan”). See Note 13 below for further details regarding the 2019 Plan.
| 13 |
The 2019 Plan provides certain employees, contractors, and outside directors with share-based compensation in the form of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights and other awards. The fair values of incentive stock option award grants are estimated as of the date of grant using a Black-Scholes option valuation model. Compensation expense is recognized in the condensed consolidated statements of operations on a straight-line basis over the requisite service period, which is generally the vesting period.
Income Taxes
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities at the applicable tax rates. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates.
Tax benefits are recognized from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by a tax authority and based upon the technical merits of the tax position. The tax benefit recognized in the condensed consolidated financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized upon settlement. An unrecognized tax benefit, or a portion thereof, is presented in the condensed consolidated financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed.
Leases
ASC 842, Leases, requires recognition of leases on the condensed consolidated balance sheets as right-of-use (“ROU”) assets and lease liabilities. ROU assets represent the Company’s right to use underlying assets for the lease terms and lease liabilities represent the Company’s obligation to make lease payments arising from the leases. Operating lease ROU assets and operating lease liabilities are recognized based on the present value and future minimum lease payments over the lease term at commencement date. As the Company’s leases do not provide an implicit rate, the Company used its estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. A number of the lease agreements contain options to renew and options to terminate the leases early. The lease term used to calculate ROU assets and lease liabilities only includes renewal and termination options that are deemed reasonably certain to be exercised.
The Company recognized lease liabilities, with corresponding ROU assets, based on the present value of unpaid lease payments for existing operating leases longer than twelve months. The ROU assets were adjusted per ASC 842 transition guidance for existing lease-related balances of accrued and prepaid rent, and unamortized lease incentives provided by lessors. Operating lease cost is recognized as a single lease cost on a straight-line basis over the lease term and is recorded in selling, general and administrative expenses. Variable lease payments for common area maintenance, property taxes and other operating expenses are recognized as expense in the year when the changes in facts and circumstances on which the variable lease payments are based occur. The Company has elected not to separate lease and non-lease components for all property leases for the purposes of calculating ROU assets and lease liabilities.
Variable Interest Entity
The Company reviews each legal entity formed by parties related to the Company to determine whether or not the Company has a variable interest in the entity and whether or not the entity would meet the definition of a variable interest entity (“VIE”) in accordance with ASC Topic 810, Consolidation. In assessing whether the Company has a variable interest in the entity as a whole, the Company considers and makes judgements regarding the purpose and design of the entity, the value of the licensed assets to the entity, the value of the entity’s total assets and the significant activities of the entity. If the Company has a variable interest in the entity as a whole, the Company assesses whether or not the Company is a primary beneficiary of that VIE, based on a number of factors, including: (i) which party has the power to direct the activities that most significantly affect the VIE’s economic performance, (ii) the parties’ contractual rights and responsibilities pursuant to the collaboration agreement, and (iii) which party has the obligation to absorb losses of or the right to receive benefits from the VIE that could be significant to the VIE.
| 14 |
If the Company determines that it is the primary beneficiary of a VIE at the onset of the collaboration, the collaboration is treated as a business combination and the Company consolidates the financial statements of the VIE into the Company’s condensed consolidated financial statements. As of December 31, 2023, and on a quarterly basis thereafter, the Company will evaluate whether it continues to be the primary beneficiary of the consolidated VIE. If the Company determines that it is no longer the primary beneficiary of a consolidated VIE, it deconsolidates the VIE in the period in which the determination is made.
Assets and liabilities recorded as a result of consolidating the financial results of the VIE into the Company’s condensed consolidated balance sheet do not represent additional assets that could be used to satisfy claims against the Company’s general assets or liabilities for which creditors have recourse to the Company’s general assets.
Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by the FASB, or other standard setting bodies and adopted by us as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on our condensed consolidated financial position or results of operations upon adoption.
In June 2016, the FASB issued Accounting Standards Update (“ASU’) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU 2016-13 is effective for the Company’s fiscal year beginning January 1, 2023 and subsequent interim periods. The Company adopted this new standard during the year ended December 31, 2023 and it did not have a material impact to its condensed consolidated financial statements.
Accounting Pronouncements Issued But Not Yet Adopted
In June 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-05, Business Combinations (ASC Topic 805): Joint Venture Formations, which provides guidance on accounting for joint ventures established through new entities. The update mandates the application of the acquisition method of accounting for such transactions, requiring parties to recognize and measure identifiable assets and liabilities based on fair values at the acquisition date and establishes a measurement period for adjustments. The amendments in this Update are effective prospectively for all joint venture formations with a formation date on or after January 1, 2025. ASU 2023-05 will be effective for non-public entities for annual periods beginning after December 15, 2025, with early adoption permitted. The Company is currently evaluating the implications of this update on its accounting practices for joint ventures and expects it will enhance consistency and transparency in financial reporting, without a material impact on its financial position or results of operations.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU requires that an entity disclose specific categories in the effective tax rate reconciliation as well as reconciling items that meet a quantitative threshold. Further, the ASU requires additional disclosures on income tax expense and taxes paid, net of refunds received, by jurisdiction. The new standard is effective for annual periods beginning after December 15, 2024 on a prospective basis with the option to apply it retrospectively. Early adoption is permitted. The adoption of this guidance will result in the Company being required to include enhanced income tax related disclosures. The Company is currently evaluating the impact this standard will have on its condensed consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU includes amendments that expand the existing reportable segment disclosure requirements and requires disclosure of (i) significant expense categories and amounts by reportable segment as well as the segment’s profit or loss measure(s) that are regularly provided to the chief operating decision maker (the “CODM”) to allocate resources and assess performance; (ii) how the CODM uses each reported segment profit or loss measure to allocate resources and assess performance; (iii) the nature of other segment balances contributing to reported segment profit or loss that are not captured within segment revenues or expenses; and (iv) the title and position of the individual or name of the group or committee identified as the CODM. This guidance requires retrospective application to all prior periods presented in the financial statements and is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The adoption of this guidance will result in the Company being required to include enhanced disclosures relating to its reportable segments. The Company is currently evaluating the impact this standard will have on its condensed consolidated financial statements.
| 15 |
4. Business Segments
The Company’s CODM evaluates the financial performance of the Company’s segments based upon segment adjusted operating income or (loss) as the profitability measure. Items outside of adjusted operating income or (loss) are not reported by segment, since they are excluded from the single measure of segment profitability reviewed by the CODM.
Summarized financial information concerning the Company’s reportable segments for each of the quarters ended September 30, 2024 and 2023 is presented below.
For Quarter Ended September 30, 2024 ($ in thousands)
| NexGel | CGN JV | Total | ||||||||||
| Revenue | ||||||||||||
| Contract Manufacturing | $ | $ | $ | |||||||||
| Custom and White Label Finished Goods | ||||||||||||
| Branded Consumer Products | ||||||||||||
| Other income | ||||||||||||
| Total revenue | ||||||||||||
| Cost of sales | ||||||||||||
| Operating expenses | ||||||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
For Quarter Ended September 30, 2023 ($ in thousands)
| NexGel | CGN JV | Total | ||||||||||
| Revenue | ||||||||||||
| Contract Manufacturing | $ | $ | $ | |||||||||
| Custom and White Label Finished Goods | ||||||||||||
| Branded Consumer Products | ||||||||||||
| Other income | ||||||||||||
| Total revenue | ||||||||||||
| Cost of sales | ||||||||||||
| Operating expenses | ||||||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| 16 |
For the Nine Months Ended September 30, 2024 ($ in thousands)
| NexGel | CGN JV | Total | ||||||||||
| Revenue | ||||||||||||
| Contract Manufacturing | $ | $ | $ | |||||||||
| Custom and White Label Finished Goods | ||||||||||||
| Branded Consumer Products | ||||||||||||
| Other income | ||||||||||||
| Total revenue | ||||||||||||
| Cost of sales | ||||||||||||
| Operating expenses | ||||||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
For the Nine Months Ended September 30, 2023 ($ in thousands)
| NexGel | CGN JV | Total | ||||||||||
| Revenue | ||||||||||||
| Contract Manufacturing | $ | $ | $ | |||||||||
| Custom and White Label Finished Goods | ||||||||||||
| Branded Consumer Products | ||||||||||||
| Other income | ||||||||||||
| Total revenue | ||||||||||||
| Cost of sales | ||||||||||||
| Operating expenses | ||||||||||||
| Loss from operations | $ | ( | ) | $ | $ | ( | ) | |||||
As of September 30, 2024 ($ in thousands)
| NexGel | CGN JV | Total | ||||||||||
| Assets: | ||||||||||||
| Current assets: | ||||||||||||
| Cash | $ | $ | $ | |||||||||
| Accounts receivable, net | ||||||||||||
| Inventory | ||||||||||||
| Prepaid expenses and other current assets | ||||||||||||
| Total current assets | ||||||||||||
| Goodwill | ||||||||||||
| Intangibles, net | ||||||||||||
| Property and equipment, net | ||||||||||||
| Operating lease – right of use asset | ||||||||||||
| Other assets | ||||||||||||
| Total Assets | $ | $ | $ | |||||||||
| Liabilities | ||||||||||||
| Current liabilities: | ||||||||||||
| Accounts payable | $ | $ | $ | |||||||||
| Accrued expenses and other current liabilities | ||||||||||||
| Deferred revenue | ||||||||||||
| Current portion of note payable | ||||||||||||
| Warrant liability | ||||||||||||
| Contingent consideration liability | ||||||||||||
| Financing lease liability, current portion | ||||||||||||
| Operating lease liabilities, current portion | ||||||||||||
| Total current liabilities | ||||||||||||
| Financing lease liability, net of current portion | ||||||||||||
| Operating lease liabilities, net of current portion | ||||||||||||
| Notes payable, net of current portion | ||||||||||||
| Total liabilities | $ | $ | $ | |||||||||
| 17 |
As of December 31, 2023 ($ in thousands)
| NexGel | CGN JV | Total | ||||||||||
| Assets: | ||||||||||||
| Current assets: | ||||||||||||
| Cash | $ | $ | $ | |||||||||
| Accounts receivable, net | ||||||||||||
| Inventory | ||||||||||||
| Prepaid expenses and other current assets | ||||||||||||
| Total current assets | ||||||||||||
| Goodwill | ||||||||||||
| Intangibles, net | ||||||||||||
| Property and equipment, net | ||||||||||||
| Operating lease – right of use asset | ||||||||||||
| Other assets | ||||||||||||
| Total Assets | $ | $ | $ | |||||||||
| Liabilities | ||||||||||||
| Current liabilities: | ||||||||||||
| Accounts payable | $ | $ | $ | |||||||||
| Accrued expenses and other current liabilities | ||||||||||||
| Deferred revenue | ||||||||||||
| Current portion of note payable | ||||||||||||
| Warrant liability | ||||||||||||
| Contingent consideration liability | ||||||||||||
| Operating lease liability, current portion | ||||||||||||
| Total current liabilities | ||||||||||||
| Operating lease liability, net of current portion | ||||||||||||
| Notes payable, net of current portion | ||||||||||||
| Total liabilities | $ | $ | $ | |||||||||
5. Acquisition
Silly George Acquisition
On May 15, 2024, the Company entered into and closed a transaction related to an Asset Purchase Agreement dated May 15, 2024 (the “SG Purchase Agreement”) with Semmens Online Pty Ltd as Trustee for Semmens Business Trust, an Australian proprietary limited company (the “SG Seller”), whereby the Company purchased the Silly George assets. The Company believes the Silly George assets will be accretive and synergistic to its existing health and beauty customer product brands.
Under
the terms of the SG Purchase Agreement and on the Closing Date, the Company paid the SG Seller a cash payment of $
| Provisional purchase consideration at preliminary fair value: | ||||
| Purchase price | $ | |||
| Contingent consideration liability | ||||
| Consideration paid | $ | |||
| Trademark related intangibles | ||||
| Intangible assets acquired | $ |
Kenkoderm Acquisition
On December 1, 2023, the Company closed a transaction related to an Asset Purchase Agreement dated November 30, 2023 (the Kenkoderm Purchase Agreement”) with Olympus Trading Company, LLC, a Virginia limited liability company, whereby the Company purchased all assets related to the Kenkoderm Seller’s skincare line focused on reducing symptoms associated with psoriasis operating under the tradename “Kenkoderm” (“Kenkoderm acquisition”). The Company believes the Kenkoderm brand fits its health and wellness lines of product.
Under
the terms of the Kenkoderm Purchase Agreement, the Company paid the Kenkoderm Seller a cash payment of $
The
provisional fair value of the purchase consideration issued to the Kenkoderm Seller was allocated to the net tangible assets acquired.
The Company accounted for the Kenkoderm acquisition as the purchase of a business under GAAP under the acquisition method of accounting,
and the assets and liabilities acquired were recorded as of the acquisition date, at their respective fair values and condensed consolidated
with those of the Company. The fair value of the net assets acquired was approximately $
| 18 |
The table below shows a preliminary analysis for the Kenkoderm acquisition ($ in thousands):
| Provisional purchase consideration at preliminary fair value: | ||||
| Purchase price | $ | |||
| Contingent consideration liability | ||||
| Amount of consideration | $ | |||
| Assets acquired and liabilities assumed at preliminary fair value | ||||
| Inventory | $ | |||
| Product/technology related intangibles | ||||
| Marketing related intangibles | ||||
| Net tangible assets acquired | $ | |||
| Total net assets acquired | $ | |||
| Consideration paid | ||||
| Preliminary goodwill | $ |
Sports Defense Acquisition
On May 29, 2020, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) whereby the Company purchased all of the outstanding equity securities of Sport Defense LLC, a Delaware limited liability company (“Sports Defense”), from the members of Sport Defense (the “Sellers”). Subsequent to the Closing Date, Sport Defense is a wholly-owned subsidiary of the Company.
Sport Defense is a marketing and distribution company that leverages the unique benefits of ultra-gentle, high-water content hydrogels, manufactured by the Company, to build brands that treat various ailments of the skin caused by athletic training, such as blisters, turf burns, scrapes and skin irritations.
Under
the terms of the Purchase Agreement, the purchase price paid to the Sellers was an aggregate of $
Adam Levy, the Company’s Chief Executive Officer and Chief Financial Officer, and Nachum Stein, a member of the Company’s Board of Directors (the “Board”), were each members of Sport Defense and part of the Sellers. Mr. Levy received of the Shares and Mr. Stein received of the Shares. Due to the potential conflict of interest that existed because of Messrs. Levy and Stein’s partial ownership of Sport Defense, the Board obtained an independent investment bank to prepare a valuation report with respect to Sport Defense. This valuation report supported the Sports Defense Purchase Price. Also, Mr. Stein recused himself from the vote of the Board regarding the approval to purchase Sport Defense.
The Purchase Agreement and the Sport Defense acquisition were not subject to approval by the shareholders of the Company. The Purchase Agreement contained minimal representations and warranties regarding Sport Defense and certain limited representations and warranties regarding the Company and the Sellers.
The
fair value of the purchase consideration issued to the Seller was allocated to the net tangible assets acquired. The Company accounted
for the Sports Defense acquisition as the purchase of a business under GAAP under the acquisition method of accounting, and the assets
and liabilities acquired were recorded as of the acquisition date, at their respective fair values and consolidated with those of the
Company. The fair value of the net assets acquired was approximately $
The table below shows an analysis for the Sports Defense acquisition:
| Purchase Consideration at preliminary fair value: | ||||
| Purchase price | $ | |||
| Amount of consideration | $ | |||
| Assets acquired and liabilities assumed at preliminary fair value | ||||
| Inventories | ||||
| Product/Technology related intangibles | ||||
| Marketing related intangibles | ||||
| Customer related intangibles | ||||
| Accounts payable and accrued expenses | ( | ) | ||
| Other liabilities | ||||
| Net tangible assets acquired | $ | |||
| Total net assets acquired | $ | |||
| Consideration paid | ||||
| Preliminary goodwill | $ |
Interest in Joint Venture – CGN
On
March 1, 2023, the Company acquired a
The JV is considered to be a VIE and we have consolidated the JV because we believe we are the primary beneficiary because we meet the Power and the Economics Criteria, as laid out in ASC 323.
The Company recorded assets acquired and liabilities assumed in connection with the formation of the JV based on their estimated fair values as of the March 1, 2023. The purchase price allocation is as follow ($ in thousands):
| Purchase consideration at fair value: | ||||
| Cash contributed by the Company | $ | |||
| Noncontrolling interest portion of CG Labs contributed business | ||||
| Consideration Paid | $ | |||
| Assets acquired and liabilities assumed at fair value | ||||
| Cash contributed by the Company | ||||
| Fixed assets | ||||
| Product/technology related intangibles | ||||
| Marketing related intangibles | ||||
| Net tangible assets acquired | $ | |||
Interest in Joint Venture – Enigma
On
January 6, 2023, the Company acquired a
The JV is considered to be a VIE and we have consolidated the JV because we believe we are the primary beneficiary because we meet the Power and the Economics Criteria, as laid out in ASC 323.
The allocation of the purchase price to identifiable assets is based on the preliminary valuations performed to determine the fair value of the net assets as of the acquisition date. The measurement period for the valuation of net assets acquired ends as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but not to exceed 12 months following the acquisition date. Adjustments in purchase price allocations may require a change in the amounts allocated to net assets acquired during the periods in which the adjustments are determined.
| 19 |
The unaudited pro-forma condensed consolidated results of operations are presented for information purposes only. The unaudited pro-forma condensed consolidated results of operations are not intended to present actual results that would have been attained had the Kenkoderm and Silly George acquisitions and the CGN JV and Enigma JV been completed as of January 1, 2023 or to project potential operating results as of any future date or for any future periods ($ in thousands except share and per share amounts):
| September 30, | September 30, | |||||||
| 2024 | 2023 | |||||||
| Revenues, net | $ | $ | ||||||
| Net loss allocable to common shareholders | $ | ( | ) | $ | ( | ) | ||
| Net loss per share | $ | ) | $ | ) | ||||
| Weighted average number of shares outstanding | ||||||||
6. Operating Leases
The
Company has an operating lease for a commercial manufacturing facility and administrative offices located in Langhorne, Pennsylvania
that runs through January 2031.
The Company also has a sublease for office and manufacturing space in Granbury, Texas that runs through February 2028.There is an option that can extend the lease term for an additional five years through February 2033. The exercise of the lease options to renew is solely at the Company’s discretion.
The following table presents information about the amount and timing of the liability arising from the Company’s operating lease as of September 30, 2024 ($ in thousands):
| Maturity of Lease Liability | Operating Lease Liabilities | |||
| 2024 (Remainder of year) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total undiscounted operating lease payments | ||||
| Less: Imputed interest | ( | ) | ||
| Present value of operating lease liabilities | $ | |||
| Weighted average remaining lease term | ||||
| Weighted average discount rate | % | |||
Total
operating lease expense for the nine months ended September 30, 2024 and 2023, was $
Supplemental cash flows information related to leases was as follows:
| September 30, | ||||
| 2024 | ||||
| Cash paid for amounts included in the measurement of lease liability ($ in thousands): | ||||
| Operating cash flows from operating lease | $ | |||
| 20 |
7. Financing Lease
In
February 2024, the CGN JV entered into a lease agreement for certain equipment under separate non-cancelable equipment loan and security
agreements. The agreement matures in January 2030. The agreements require monthly payments of principal and interest through maturity
and are secured by the assets under the lease. As of September 30, 2024, $
The following table presents information about the amount and timing of the liability arising from the Company’s financing lease as of September 30, 2024 ($ in thousands):
| Maturity of Lease Liability | Financing Lease Liability | |||
| 2024 (Remainder of year) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total undiscounted financing lease payments ` | ||||
| Less: Imputed interest | ( | ) | ||
| Present value of financing lease liability | $ | |||
| Weighted average remaining lease term | ||||
| Weighted average discount rate | % | |||
8. Inventory
Inventory consists of the following ($ in thousands):
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-progress | ||||||||
| Finished goods | ||||||||
| Less: Inventory reserve for excess and slow moving inventory | ||||||||
| Total | $ | $ | ||||||
Inventory is maintained at the Company’s warehouses and at fulfillment centers owned by Amazon, Walmart and CVS. The Company builds its contract manufacturing products based on customer orders and immediately ships the products upon completion of the production process.
9. Property and Equipment, Net
Property and equipment consist of the following ($ in thousands):
| Useful Life | September 30, | December 31, | ||||||||
| (Years) | 2024 | 2023 | ||||||||
| Machinery and equipment | $ | $ | ||||||||
| Office furniture and equipment | ||||||||||
| Leasehold improvements | ||||||||||
| Construction in progress | N/A | |||||||||
| Less: accumulated depreciation and amortization | ( | ) | ( | ) | ||||||
| Property and equipment, net | $ | $ | ||||||||
| 21 |
Depreciation
expense for the nine months ended September 30, 2024 and 2023 was $
10. Intangible Assets
The following provides a breakdown of identifiable intangible assets as of September 30, 2024 and December 31, 2023 ($ in thousands):
| Useful Life | September 30, | December 31, | ||||||||
| (Years) | 2024 | 2023 | ||||||||
| Product/Technology Related | ||||||||||
| Identifiable intangible assets, gross | $ | $ | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||||
| Product/technology related identifiable intangible assets, net | ||||||||||
| Marketing Related | ||||||||||
| Customer related intangible asset, gross | ||||||||||
| Tradename related intangible asset, gross | ||||||||||
| Trademark related intangibles | ||||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||||
| Marketing related identifiable intangible assets, net | ||||||||||
| Total identifiable intangible assets, net | $ | $ | ||||||||
In
connection with the May 29, 2020 acquisition of Sports Defense, the Company identified intangible assets of $
In
connection with the March 1, 2023 CGN JV, the Company identified intangible assets of $
In
connection with the December 1, 2023 acquisition of Kenkoderm, the Company identified intangible assets of $
In
connection with the May 15, 2024 acquisition of Silly George, the Company identified intangible assets of $
Intangible assets with indefinite lives are tested for impairment within one year of the acquisition date or annually as of December 31, and whenever indicators of impairment exist.
These
assets are being amortized on a straight-line basis over their weighted average estimated useful life of
As of September 30, 2024, the estimated annual amortization expense for each of the next five fiscal years is as follows ($ in thousands):
| 2024 (remainder of the year) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Subtotal | ||||
| Indefinite lived intangible assets (subject to impairment analysis) | ||||
| Total | $ |
| 22 |
11. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following ($ in thousands):
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Salaries, benefits, and incentive compensation | $ | $ | ||||||
| Margin line of credit | ||||||||
| Other | ||||||||
| Total accrued expenses and other current liabilities | $ | $ | ||||||
12. Common Stock
At September 30, 2024, the Company has reserved common stock for issuance in relation to the following:
| Share-based compensation plan | ||||
| Warrants to purchase common stock | ||||
| Restricted stock units |
On
August 8, 2024, the Company entered into subscription agreements with investors and certain members of its board of directors and management
for the sale by the Company of an aggregate of units at a price to the public of $ per unit (the “August Financing”),
with each unit consisting of two shares of the Company’s common stock and a warrant to purchase one share of common stock at an
exercise price of $
Subject
to certain ownership limitations, each of the August Warrants will became exercisable on the August Closing Date and will expire
The
net proceeds to the Company from the August Offering were approximately $
The
Company retained Alere Financial Partners, LLC (a division of Cova Capital Partners, LLC) to act as the placement agent (the “August
Placement Agent”) for the August Offering. The Company agreed to pay the August Placement Agent a cash fee of
On
June 6, 2024, Company issued common shares to a consultant valued at $
On
February 15, 2024, the Company entered into subscription agreements with investors and certain members of its board of directors and
management for the sale by the Company of an aggregate of units at a price to the public of $ per unit (the “February
Offering”), with each unit consisting of two shares of the Company’s common stock and a warrant to purchase one share of
common stock at an exercise price of $
Subject
to certain ownership limitations, each of the February Warrants became exercisable on the February Closing Date and will expire
The
net proceeds to the Company from the February Offering were $
The
Company retained Alere Financial Partners, LLC (A division of Cova Capital Partners, LLC) (the “February Placement Agent”)
to act as the placement agent for the February Offering. The Company paid the February Placement Agent a cash fee of
The 2019 Plan provides for the granting of incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights (“SARs”), restricted stock units, performance awards, dividend equivalent rights and other awards, which may be granted singly, in combination, or in tandem, and which may be paid in cash, shares of common stock of the Company or a combination of cash and shares of common stock of the Company. The Company initially reserved a total of shares of the Company’s common stock for awards under the 2019 Plan. Effective as of May 26, 2020 and May 3, 2021, respectively, the Board approved an increase of the number of authorized shares of common stock reserved under the 2019 Plan from shares of common stock to and from shares of common stock to shares of common stock, all of which may be delivered pursuant to incentive stock options.
| 23 |
On
March 23, 2023, the Board approved an additional
| Awards | Awards | Awards | ||||||||||||||
| Reserved for | Issued & | Awards | Available for | |||||||||||||
| Issuance | Outstanding | Exercised | Grant | |||||||||||||
| 2019 Plan(1) | ||||||||||||||||
| Awards issued in excess of 2019 Plan(2) | ||||||||||||||||
| (1) | |
| (2) |
Incentive stock options
| Weighted | ||||||||||||
| Weighted | Average | |||||||||||
| Average | Contractual | |||||||||||
| Number of | Exercise | Term in | ||||||||||
| Options | Price | Years | ||||||||||
| Outstanding at January 1, 2024 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ( | ) | — | |||||||||
| Forfeited | — | |||||||||||
| Cancelled | ( | ) | — | |||||||||
| Expired | ( | ) | — | |||||||||
| Outstanding at September 30, 2024 | $ | |||||||||||
| Exercisable at September 30, 2024 | $ | |||||||||||
As of September 30, 2024 and 2023, vested outstanding stock options had $ thousand and $ thousand of intrinsic value as the exercise price is greater than the estimated fair value of the underlying common stock, respectively. As of September 30, 2024, there were $ thousand of unrecognized share-based compensation related to unvested stock options, excluding options fully contingent upon certain sales-based milestones being achieved within to months of commercial release.
Restrictive stock awards
Effective as of January 1, 2024, the Company granted an aggregated restricted stock award of shares of the Company’s common stock to Adam Levy for his service as our Chief Executive Officer pursuant to the terms of his Executive Employment Agreement dated December 31, 2023. The shares vest monthly from April 1, 2024 through December 31, 2024. Under ASC 718, Compensation—Stock Compensation, the Company has measured the value of the shares granted based on the closing price of the Company’s stock at the grant date of the RSU Grant ($ per share).
| 24 |
| Weighted | ||||||||
| Average | ||||||||
| Number of | Grant Date | |||||||
| Units | Fair Value | |||||||
| Outstanding at January 1, 2024 | $ | |||||||
| Granted | ||||||||
| Exercised and converted to common shares | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Outstanding at September 30, 2024 | $ | |||||||
| Exercisable at September 30, 2024 | $ | |||||||
Compensation expense will be recognized ratable over the total vesting schedule. The Company will periodically adjust the cumulative compensation expense for forfeited awards. Stock based compensation of $ thousand and $ thousand has been recorded for the nine months ended September 30, 2024 and 2023, respectively. As of September 30, 2024, there was $ thousand unrecognized share-based compensation related to unvested RSUs, which the Company expects to recognize through December 2025.
Warrants
The following table shows a summary of common stock warrants through September 30, 2024:
| Weighted | Weighted | |||||||||||
| Average | Average | |||||||||||
| Number of | Exercise | Contractual | ||||||||||
| Warrants | Price | Term in Years | ||||||||||
| Outstanding at January 1, 2024 (originally reported) | $ | |||||||||||
| Warrants – 2021 IPO(1) | ||||||||||||
| Outstanding at January 1, 2024 (corrected) | ||||||||||||
| Granted | ||||||||||||
| Exercised | — | |||||||||||
| Forfeited | — | |||||||||||
| Cancelled | — | |||||||||||
| Expired | — | |||||||||||
| Outstanding at September 30, 2024 | $ | |||||||||||
| Exercisable at September 30, 2024 | $ | |||||||||||
| (1) |
As of September 30, 2024 and 2023, vested outstanding warrants had no intrinsic value as the exercise price is greater than the estimated fair value of the underlying common stock.
14. Notes Payable
CGN JV Notes Payable
The
CGN JV has entered into a $
The
CGN JV has entered into a $
| 25 |
NexGel
The
Company has entered into a $
Economic Injury Disaster Loan
On
May 28, 2020, the Company entered into the standard loan documents required for securing a loan (the “EIDL Loan”) from the
SBA under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on
the Company’s business. Pursuant to that certain Loan Authorization and Agreement (the “SBA Loan Agreement”), the principal
amount of the EIDL Loan is up to $
The future annual principal amounts and accrued interest to be paid as of September 30, 2024 are as follows:
| Amount | ||||
| For the year ending December 31 ($ in thousands): | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
| 26 |
15. Warrant Liability
On
September 2, 2021, March 11, 2021, February 3, 2021, December 24, 2020, March 18, 2020, September 10, 2019, and November 6, 2019, the
Company issued
The warrants outstanding and fair values at each of the respective valuation dates are summarized below:
| Warrant Liability | Warrants Outstanding | Fair Value per Share | Fair Value | |||||||||
| Fair value as of year ended 12/31/2023 | $ | |||||||||||
| Change in fair value of warrant liability | ( | ) | ||||||||||
| Fair value as of year ended 9/30/2024 | $ | |||||||||||
| 2024 | 2023 | |||||||
| Exercise price | $ | $ | ||||||
| Share price | $ | - $ | $ | |||||
| Volatility | % - | % | % - | % | ||||
| Risk-free interest rate | % - | % | % - | % | ||||
| Dividend yield | % | % | ||||||
| Expected term | to years | to years | ||||||
The warrant liabilities are considered Level 3 liabilities on the fair value hierarchy as the determination of fair value includes various assumptions about of future activities and the Company’s stock prices and historical volatility of Guideline Public Companies as inputs.
16. Commitments and Contingencies
Litigation
The Company may be subject to legal proceedings and claims that arise in the ordinary course of business. Management is not currently aware of any matters that will have a material effect on the condensed consolidated financial position, results of operations, or cash flows of the Company.
Service Agreement
On March 21, 2023, the Company entered into a Services Agreement with GlaxoSmithKline Consumer Healthcare Holdings (US) LLC (“Haleon”) to supply material for a consumer product to be developed and released in the future. There can be no guaranty that a consumer product will be released or, if released, that it will be successful.
17. Concentrations of Risk
The Company’s revenues are concentrated in a small group of customers with some individually having more than 10% of total revenues.
Revenues
from one customer that exceeded 10% of total revenues for the nine months ended September 30, 2024, was
Revenues
from three customers that exceeded 10% of total revenues for the nine months ended September 30, 2023, were
The
Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash, cash equivalents and
marketable securities. Cash balances are maintained principally at major U.S. financial institutions and are insured by the Federal Deposit
Insurance Corporation (“FDIC”) up to regulatory limits. Such cash balances are currently in excess of the FDIC insurance
limit of $
Marketable securities are comprised of U.S. treasury bills with original maturities greater than three months. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash, cash equivalents, and marketable securities and performs periodic evaluations of the credit standing of such institutions.
18. Related Party Transactions
Advances
Dr.
Jerome Zeldis, a member of the Company board of directors, has an outstanding balance due of $
19. Subsequent Events
Management of the Company has performed a review of events and transactions occurring after the condensed consolidated balance sheet date to determine if there were any such events or transactions requiring adjustment to or disclosure in the accompanying condensed consolidated financial statements, noting no such events or transactions except as set forth below:
On
November 11, 2024, the Company entered into subscription agreements with investors and certain members of its board of directors and
management for the sale by the Company of an aggregate of units at a price to the public of $ per unit (the
“November Financing”), with
Subject
to certain ownership limitations, each of the November Warrants will become exercisable on the November Closing Date and will expire
Certain members of the Company’s board of directors and management have agreed to purchase an aggregate of units in the November Financing. In connection with the November Financing, the members of board of directors and management purchasing units in the November Financing have agreed not to offer, issue, sell, contract to sell, encumber, grant any option for the sale of or otherwise dispose of any of securities relating to the units for a period of 180 days following the date of the prospectus used in the November Financing.
The
gross proceeds to the Company from the November Financing are expected to be approximately $
The
Company retained Alere Financial Partners, LLC (a division of Cova Capital Partners, LLC) to act as the placement agent (the “November
Placement Agent”) for the November Financing. The Company agreed to pay the November Placement Agent a cash fee of
| 27 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis are intended to help prospective investors understand our business, financial condition, results of operations, liquidity and capital resources. You should read this discussion in conjunction with our condensed consolidated financial statements and related notes thereto included elsewhere in this information statement.
The statements in this discussion regarding industry outlook, expectations regarding our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Special Note Regarding Forward-Looking Statements.” Actual results may differ materially from those contained in any forward-looking statements.
The NexGel Financial Statements, discussed below, reflect the NexGel financial condition, results of operations, and cash flows. The financial information discussed below and included in this information statement, however, may not necessarily reflect what the NexGel financial condition, results of operations, or cash flows would have been had NexGel been operated as a separate, independent entity during the years presented, or what the NexGel financial condition, results of operations, and cash flows may be in the future.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements,” which include information relating to future events, future financial performance, strategies, expectations, competitive environment and regulation. Words such as “may,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will actually be achieved. Forward-looking statements are based on information we have when those statements are made or our management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:
| ● | our ability to continue as a going concern; | |
| ● | inadequate capital; | |
| ● | inadequate or an inability to raise sufficient capital to execute our business plan; | |
| ● | our ability to comply with current good manufacturing practices; | |
| ● | loss or retirement of key executives; | |
| ● | our plans to make significant additional outlays of working capital before we expect to generate significant revenues and the uncertainty regarding when we will begin to generate significant revenues, if we are able to do so; | |
| ● | adverse economic conditions and/or intense competition; | |
| ● | loss of a key customer or supplier; | |
| ● | entry of new competitors; |
| 28 |
| ● | adverse federal, state and local government regulation; | |
| ● | technological obsolescence of our manufacturing process and equipment; | |
| ● | technical problems with our research and products; | |
| ● | risks of mergers and acquisitions including the time and cost of implementing transactions and the potential failure to achieve expected gains, revenue growth or expense savings; | |
| ● | price increases for supplies and components; and | |
| ● | the inability to carry out our business plans. |
For a discussion of these and other risks that relate to our business and investing in shares of our common stock, you should carefully review the risks and uncertainties described elsewhere in the Company’s Annual Report on Form 10-K filed with the SEC on April 20, 2024. The forward-looking statements contained in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. We do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events.
Overview
From 2019 through November 2023, we only manufactured high water content, electron beam cross-linked, aqueous polymer hydrogels, or gels, used for wound care, medical diagnostics, transdermal drug delivery and cosmetics. We specialize in custom gels by capitalizing on proprietary manufacturing technologies. We have historically served as a contract manufacturer, supplying our gels to third parties who incorporate them into their own products. Beginning in 2020, we created two new lines of business for the company. First, our own line of branded consumer products sold direct to consumers. Second, we expanded into custom and white label opportunities, which focuses on combining our gels with proprietary branded products and white label opportunities. All of our gel products are manufactured using proprietary and non-proprietary mixing, coating and cross-linking technologies. Together, these technologies enable us to produce gels that can satisfy rigid tolerance specifications with respect to a wide range of physical characteristics (e.g., thickness, water content, adherence, absorption, moisture vapor transmission rate [a measure of the passage of water vapor through a substance] and release rate) while maintaining product integrity. Additionally, we have the manufacturing ability to offer broad choices in the selection of liners onto which the gels are coated. Consequently, we and our customers are able to determine tolerances in moisture vapor transmission rate and active ingredient release rates while personalizing color and texture.
On March 1, 2023, the Company acquired a 50% interest in a newly formed JV for its converting and packaging business. The new JV expands the Company’s offerings, allowing it to reach more customers with a variety of gel shapes and sizes. The Company had limited converting and packaging operations in its Langhorne Facility, making a JV to expand capacity an attractive opportunity.
Beginning in December 2023, the Company expanded their product portfolio to include the Kenkoderm brand. Kenkoderm is a skincare line focused on reducing symptoms associated with psoriasis. Kenkoderm products do not utilize our gel technology and are manufactured by third parties. This marks the first time the company expanded its product portfolio to include products unrelated to its core gel technology.
Beginning in May 2024, the Company added the Silly George brand. Silly George is a beauty and cosmetics company focused on eyeliner, fake eyelashes, lash serum and mascara. Similar to Kenkoderm, Silly George products are purchased and resold from third party manufacturers. This second acquisition further expanded the Company’s retail sales presence in products unrelated to its core gel technology.
Joint Ventures
CGN
On March 1, 2023, the Company acquired a 50% interest in its newly formed JV for its converting and packaging business. The JV agreement is effective March 1, 2023. As a result of this transaction, the Company owns 50% of the JV, with the remaining 50% held by CG Labs.
Enigma Health
On January 6, 2023, the Company acquired a 50% interest in its newly formed JV to pursue branded consumer product retail opportunities and the development of new patch products. The JV agreement is effective January 6, 2023. As a result of this transaction, the Company owns 50% of the JV, with the remaining 50% held by Moiety.
Acquisitions
Kenkoderm
On December 1, 2023, we purchased substantially all of the assets of Olympus Trading Company, LLC (the “Kenkoderm Seller”) related to the Seller’s skincare line focused on reducing symptoms associated with psoriasis operating under the tradename “Kenkoderm” (“Kenkoderm acquisition”).
Silly George
On May 15, 2024, the Company purchased substantially all of the assets from Semmens Online Pty Ltd as Trustee for Semmens Business Trust related to the SG Seller’s eyeliner, fake eyelashes, lash serum and mascara business operating under the tradename “Silly George”.
| 29 |
Results of Operations
The following sections discuss and analyze the changes in the significant line items in the accompanying condensed consolidated statements of operations for the comparison periods identified.
Comparison of the Three Months ended September 30, 2024 and 2023 ($ in thousands)
Revenues, net
For the three months ended September 30, 2024 revenues were $2,940 and increased by $1,719, or 140.8%, when compared to $1,221 for the three months ended September 30, 2023. The increase in our overall revenues was primarily due to sales growth in our branded consumer products, including gross revenue from Silly George of $1,373 for the three months ending September 30, 2024, and partially offset by a decrease in contract manufacturing.
The Company has four distinct lines of business; Contract Manufacturing, Custom and White Label, Branded Consumer Products, and Medical Devices.
Contract Manufacturing
Customers order rolls of gel (“rollstock”). The rollstock is shipped to our customers, which they package into finished goods. Historically, this has been the Company’s primary source of revenue.
Custom and White Label
These products often infuse various ingredients into our base gel to develop unique product offerings to satisfy market demand (e.g. aloe infused into the gel for a beauty mask). The rollstock is converted and packaged into saleable units. The finished goods are shipped to the customer, who is ultimately responsible for product distribution. Frequently these products started as development deals, in which the customer paid the company a small fee to develop a specific product. Once completed, the customer places a large order for newly developed product.
Branded Consumer Products
These products are finished goods marketed and sold directly to the customer by the Company through online and retail channels. The Company is responsible for sales, marketing, and distribution. These products carry the Company’s brand names, which include Medagel, Lumagel Beauty, Kenkoderm and Silly George.
Medical Devices/Other
Medical Devices are a hybrid business, combining elements of Custom and White Label and Branded Consumer Products. Medical Devices, which are not yet marketed, are expected to be distributed through strategic partnerships. The Company will manufacture and possibly convert/package the device while the strategic partner brings the product to market. Small market Medical Devices could be launched by the Company, but also be offered to a distributor to reach the full scale of the market.
Other includes freight charged to customers who purchase the Company’s branded consumer products through their Shopify stores.
Gross profit. Our gross profit was $1,282 thousand for the three months ended September 30, 2024 compared to a gross profit of $344 thousand for the three months ended September 30, 2023. The increase of $938 in gross profit quarter over quarter was primarily due to the increase in branded consumer products. Gross profit was 43.6% for the three months ended September 30, 2024 compared to a gross profit of 28.2% for the three months ended September 30, 2023.
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The components of cost of revenues are as follows for the three months ended September 30, 2024 and 2023 ($ in thousands):
| Three Months Ended | ||||||||
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Cost of revenues | ||||||||
| Materials and finished products | $ | 1,250 | $ | 593 | ||||
| Share-based compensation | 10 | 11 | ||||||
| Compensation and benefits | 97 | 51 | ||||||
| Depreciation and amortization | 157 | 32 | ||||||
| Equipment, production and other expenses | 144 | 190 | ||||||
| Total cost of revenues | $ | 1,658 | $ | 877 | ||||
Cost of revenues increased by $781, or 89.1%, to $1,658 for the three months ended September 30, 2024, as compared to $877 for the three months ended September 30, 2023. The increase in cost of revenues is primarily aligned with sales of branded consumer products, as both Silly George and Kenkoderm were acquired after the comparable 2023 time period.
Selling, general and administrative expenses. The following table highlights Selling, general and administrative expenses by type for the three months ended September 30, 2024 and 2023 ($ in thousands):
| Three Months Ended | ||||||||
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Selling, general and administrative expenses | ||||||||
| Compensation and benefits | $ | 239 | $ | 169 | ||||
| Share-based compensation | 143 | 66 | ||||||
| Depreciation and amortization | 27 | 5 | ||||||
| Advertising, marketing, and Amazon fees | 997 | 178 | ||||||
| Investor and shareholder services | 47 | 86 | ||||||
| Franchise tax and corporate insurance | 38 | 52 | ||||||
| Professional and consulting fees | 375 | 271 | ||||||
| Other expenses and professional fees | 204 | 123 | ||||||
| Total Selling, general and administrative expenses | $ | 2,070 | $ | 950 | ||||
Selling, general and administrative expenses increased by $1,120, or 117.9%, to $2,070 for the three months ended September 30, 2024, as compared to $950 for the three months ended September 30, 2023. The increase in Selling, general and administrative expenses is primarily attributable to the factors described below.
Compensation and benefits increased by $70, or 41.4%, to $239 for the three months ended September 30, 2024, as compared to $169 for the three months ended September 30, 2023. The number of employees increased compared to the prior period and officer compensation increased in conjunction with contract renewals.
Share-based compensation increased by $77 or 116.7%, to $143 for the three months ended September 30, 2024, as compared to $66 for the three months ended September 30, 2023. The increase related to the issuance of stock options and restricted awards to our officers, employees, board of directors, and advisors.
Advertising, marketing, Amazon fees increased by $819, or 460.1%, to $997 for the three months ended September 30, 2024, as compared to $178 for the three months ended September 30, 2023. The increase is due to the increased Amazon selling fees and an increase in advertising and marketing attributable to promoting Kenkoderm and Silly George.
Investor and shareholder services decreased by $39 or 45.3%, to $47 for the three months ended September 30, 2024, as compared to $86 for the three months ended September 30, 2023. The decrease is due to a net reduction of investor services compared to the prior year period.
Franchise taxes and corporate insurance decreased by $14, or 26.9%, to $38 for the three months ended September 30, 2024, as compared to $52 thousand for the three months ended September 30, 2023. In the prior year period, a non-recurring adjustment resulted in an increase in franchise taxes.
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Professional and consulting fees increased by $104, or 38.4%, to $375 for the three months ended September 30, 2024, as compared to $271 for the three months ended September 30, 2023. We continued to incur accounting and consulting fees associated with public company governance requirements and professional services related to branded consumer products.
Other Expenses increased by $81, or 65.9%, to $204 for the three months ended September 30, 2024 from $123 for the three months ended September 30 2023. Other Selling, general and administrative expenses generally consist of normal costs associated with our selling efforts and general management, including information technology, travel, training and recruiting.
Research and development expenses. Research and development expenses decreased by $6, or 100%, to $0 for the three months ended September 30, 2024 from $6 for the three months ended September 30, 2023. Research and development expenses are related to research costs incurred for potential products for existing or new customers.
Comparison of the Nine Months ended September 30, 2024 and 2023 (in thousands)
Revenues, net
For the nine months ended September 30, 2024, revenues were $5,647 and increased by $2,640, or 87.8%, when compared to $3,007 for the nine months ended September 30, 2023. The increase in our overall revenues was primarily due to sales growth in our branded consumer products, including gross revenue from Silly George of $1,753 from May 15, 2024 through September 30, 2024, and partially offset by a decrease in contract manufacturing.
Gross profit. Our gross profit was $1,969 for the nine months ended September 30, 2024, compared to a gross profit of $461 for the nine months ended September 30, 2023. The increase of $1,508 in gross profit recorded for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was primarily due to increase in branded consumer products. Gross profit was approximately 34.9% for the nine months ended September 30, 2024, compared to a gross profit of 15.3% for the nine months ended September 30, 2023.
The components of cost of revenues are as follows for the nine months ended September 30, 2024 and 2023 ($ in thousands):
Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Cost of revenues | ||||||||
| Materials and finished products | $ | 2,537 | $ | 1,542 | ||||
| Share based compensation | 15 | 11 | ||||||
| Compensation and benefits | 432 | 385 | ||||||
| Depreciation and amortization | 218 | 73 | ||||||
| Equipment, production, and other expenses | 476 | 535 | ||||||
| Total cost of revenues | $ | 3,678 | $ | 2,546 | ||||
| 32 |
Cost of revenues increased by $1,132, or 44.5%, to $3,678 for the nine months ended September 30, 2024, as compared to $2,546 for the nine months ended September 30, 2023. The increase in cost of revenues pertains to an increase in materials and finished products. The increase in cost of revenues is primarily aligned with sales of branded consumer products, as both Silly George and Kenkoderm were acquired after the comparable 2023 time period.
Selling, general, and administrative expenses. The following table highlights selling, general, and administrative expenses by type for the nine months ended September 30, 2024 and 2023 ($ in thousands):
Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Selling, general, and administrative expenses | ||||||||
| Compensation and benefits | $ | 743 | $ | 490 | ||||
| Share-based compensation | 246 | 109 | ||||||
| Depreciation and amortization | 110 | 32 | ||||||
| Advertising, marketing, and Amazon fees | 1,693 | 438 | ||||||
| Investor and shareholder services | 197 | 323 | ||||||
| Franchise tax and corporate insurance | 118 | 174 | ||||||
| Professional and consulting fees | 1,140 | 823 | ||||||
| Other expenses | 357 | 240 | ||||||
| Total selling, general and administrative expenses | $ | 4,604 | $ | 2,629 | ||||
Selling, general, and administrative expenses increased by $1,975 or 75.1%, to $4,604 for the nine months ended September 30, 2024, as compared to $2,629 for the nine months ended September 30, 2023. The increase in selling, general, and administrative expenses is primarily attributable to increased Advertising, marketing and Amazon fees, which directly correlates to our growth in branded consumer products.
Compensation and benefits increased by $253, or 51.6%, to $743 for the nine months ended September 30, 2024, as compared to $490 for the nine months ended September 30, 2023. The number of employees increased compared to the prior period and officer compensation increased in conjunction with contract renewals.
Share-based compensation increased by $137, or 125.7%, to $246 for the nine months ended September 30, 2024, as compared to $109 for the nine months ended September 30, 2023. The increase related to the issuance of stock options and restricted awards to our officers, employees, board of directors, and advisors.
Advertising, marketing, Amazon fees increased by $1,255 or 286.5%, to $1,693 for the nine months ended September 30, 2024, as compared to $438 for the nine months ended September 30, 2023. The increase is due to the increased Amazon selling fees and increase in advertising and marketing attributable to promoting Kenkoderm and Silly George.
Investor and shareholder services decreased by $126 or 39.0%, to $197 for the nine months ended September 30, 2024, compared to $323 for the nine months ended September 30, 2023. The decrease is due to a net reduction of investor services compared to the prior year period.
Franchise taxes and corporate insurance decreased by $56 or 32.2%, to $118 for the nine months ended September 30, 2024, as compared to $174 for the nine months ended September 30, 2023. In the prior year period, a non-recurring adjustment resulted in an increase in franchise taxes.
Professional and consulting fees increased by $317 or 38.5% to $1,140 for the nine months ended September 30, 2024, as compared to $823 for the nine months ended September 30, 2023. We continued to incur accounting and consulting fees associated with public company governance requirements and professional services related to branded consumer products.
Other expenses increased by $117, or 48.8%, to $357 for the nine months ended September 30, 2024 from $240 for the nine months ended September 30, 2023. Other Selling, general and administrative expenses generally consist of normal costs associated with our selling efforts and general management, including information technology, travel, training and recruiting.
Research and development expenses. Research and development expenses decreased by $12, or 13.3% to $78 for the nine months ended September 30, 2024 from $90 for the nine months ended September 30, 2023. Research and development expenses are related to research costs incurred for potential products for existing or new customers.
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Liquidity and Capital Resources
Cash Flow (in thousands)
| September 30, | September 30, | |||||||
| 2024 | 2023 | |||||||
| Net cash used in operating activities | $ | (3,008 | ) | $ | (2,649 | ) | ||
| Net cash provided by (used in) investing activities | (712 | ) | 4,729 | |||||
| Net cash provided by financing activities | 2,079 | 85 | ||||||
| Net increase (decrease) in cash and cash equivalents | (1,641 | ) | 2,165 | |||||
| Cash and cash equivalents at beginning of year | 2,700 | 1,101 | ||||||
| Cash and cash equivalent at end of quarter | $ | 1,059 | $ | 3,266 | ||||
As of September 30, 2024, we had $1,059 of cash and cash equivalents, compared to $2,700 of cash and cash equivalents at December 31, 2023. Net cash used in operating activities was $3,008 and $2,649 for the nine months ended September 30, 2024 and 2023, respectively.
Net cash used in investing activities was $712 and net cash provided by investing activities was $4,729 for the nine months ended September 30, 2024 and 2023, respectively, consisting of the sales of marketable securities of $62, the purchase of capital equipment of $374 and the Silly George acquisition of $400 for nine months ended September 30, 2024 and consisting of the sales of marketable securities of $5,340 and purchases of capital equipment of $611 for nine months ended September 30, 2023.
Net cash provided by financing activities for the nine months ended September 30, 2024 was $2,079 consisting of net proceeds from the February Offering and August Offering of $1,950, an investment of $37 by a joint venture partner, and from the margin line of credit of $345, offset by principal payments of notes payable of $36, a change in contingent consideration liability of $164, and by principal payment on financing lease liability of $53. Net cash used in financing activities for the nine months ended September 30, 2023 was attributable to the proceeds from the margin line of credit of $89 thousand and principal payments of notes payable and convertible notes of $4.
At September 30, 2024, current assets totaled $4,610 and current liabilities totaled $3,048 as compared to current assets totaling $5,052 and current liabilities totaling $2,549 at December 31, 2023. As a result, we had working capital of $1,562 at September 30, 2024, compared to a working capital of $2,503 at December 31, 2023. The change in the working capital as of September 30, 2024 is primarily attributable to the loss from operations of $2,713, cash paid for asset acquisition of $400, capital expenditures of $374, offset by net proceeds of $1,950 from the February Offering and August Offering.
We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we anticipate that all available funds and any earnings generated in our business will be used to finance the growth of our business and will not be paid out as dividends to our shareholders. Any future determination related to our dividend policy will be made at the discretion of our Board of Directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our Board of Directors may deem relevant.
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Management is exploring new product channel sales in consumer products, such as cosmetics, athletic products, and proprietary medical devices. The Company has increased its focus on sales and developing a sales pipeline for potential customers. This customer base expansion will enable us to provide financial stability for the foreseeable future, expand our current processes, and position us for long-term shareholder value creation.
Our recent capital raise expected to close on or about November 13, 2024 provides working capital necessary to continue our strategic objectives (discussed further within Note 19). We intend to maintain and attempt to grow our existing contract manufacturing business. We also plan to continue building and developing our catalogue of consumer products for sale to branding partners and to use our in-house capabilities to create and test market additional branded products. These products will be target marketed and sold online through social media, television and online marketplaces. Furthermore, the Company plans to develop its own proprietary medical devices and explore drug delivery programs for its technology. Additionally, the Company continues to evaluate strategic initiatives (e.g., acquisitions) and additional capital raises through debt or equity may be necessary to achieve these objectives.
We expect to continue incurring losses for the near-term future. Our ability to continue to operate as a going concern in the long term is dependent upon our ability to manage and grow our current products and to ultimately achieve profitable operations. Management may consider various options to raise capital to fund potential acquisitions through equity or debt offerings. There can be no assurances, however, that management will be able to obtain sufficient additional funds, if needed, or that such funds, if available, will be obtained on terms satisfactory to us. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and liabilities that might be necessary should we be unable to continue as a going concern.
Additionally, it is reasonably possible that estimates made in the financial statements have been, or will be, materially and adversely impacted in the near term as a result of these conditions, including the recoverability of long-lived assets.
Off Balance Sheet Arrangements
As of September 30, 2024, we had no off-balance sheet arrangements in the nature of guarantee contracts, retained or contingent interests in assets transferred to entities (or similar arrangements serving as credit, liquidity or market risk support to entities for any such assets), or obligations (including contingent obligations) arising out of variable interests in entities providing financing, liquidity, market risk or credit risk support to us, or that engage in leasing, hedging or research and development services with us.
Critical Accounting Policies and Estimates
The preparation of our accompanying condensed consolidated financial statements in accordance with generally accepted accounting principles is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. We consider the accounting policies discussed below to be critical to the understanding of our Financial Statements. Actual results could differ from our estimates and assumptions, and any such differences could be material to our Financial Statements.
Share-based compensation – We utilize share-based compensation in the form of incentive stock options. The fair values of incentive stock option award grants are estimated as of the date of grant using a Black-Scholes option valuation model. Compensation expense is recognized in the statements of operations on a straight-line basis over the requisite service period, which is generally the vesting period required to obtain full vesting. The expected term of the awards granted is estimated using the simplified method which computes the expected term as the sum of the award’s vesting term plus the original contractual term divided by two.
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Warrant Liability – Warrants to purchase common stock were issued in connection with equity financing raises which occurred during 2019 through 2024. The fair values of the warrants are estimated as of the date of issuance and again at each year end using a Black-Scholes option valuation model. At issuance, the fair value of the warrant is recognized as an equity issuance cost within additional paid-in-capital. Fair value adjustments to the warrant liability are recognized in other income (expense) in the statements of operations. The expected term of the awards granted are based on either the three-year or five-year contractual expiration date.
Black Scholes Inputs - The fair value of each stock option award and warrant issued was estimated on the date of grant using a Black-Scholes option-valuation model, which requires management to make certain assumptions regarding: (i) fair value of the common stock that underlies the stock option; (ii) the expected volatility in the market price of our common stock; (iii) dividend yield; (iv) risk-free interest rates; and (iv) the period of time employees are expected to hold the award prior to exercise (referred to as the expected term). Under the Black-Scholes option-valuation model, entities typically estimate the expected volatility based on historical volatilities of the entity’s own common stock. Based on the lack of historical data of volatility for the Company’s common stock, the Company based its estimate of expected volatility on a weighted average of the historical volatility of comparable public companies that manufacture similar products and are similar in size, stage of life cycle, and financial leverage. The fair value of the common stock that underlies the stock option is estimated by the Company considering the price of the most recent issuance of the Company’s common stock. The dividend yield is based upon the assumption that the Company will not declare a dividend over the life of the options. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for bonds with maturities consistent with the expected term of the related award.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures.
As of September 30, 2024, we conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”), as defined by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. The Disclosure Controls evaluation was done under the supervision and with the participation of management, including our chief executive officer and chief financial officer. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon this evaluation, our chief executive officer and chief financial officer have concluded that our Disclosure Controls were effective as of September, 2024 at a reasonable level of assurance.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims.
There are no material proceedings in which any of our directors, officers or affiliates or any registered or beneficial shareholder of more than 5% of our common stock is an adverse party or has a material interest adverse to our interest
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this quarterly report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2023 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. There have been no material changes during fiscal 2024 to the risk factors that were included in the Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Sales of Unregistered Securities during the nine months ended September 30, 2024
The Company did not sell any unregistered securities during the nine months ended September 30, 2024.
(b) Issuer Repurchases of Securities during the six months ended September 30, 2024
The Company did not repurchase any of its securities during the nine months ended September 30, 2024.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Plans
During
the quarter ended September 30, 2024, the officers and directors listed below
On
On
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ITEM 6. EXHIBITS
See “Index to Exhibits” for a description of our exhibits.
Index to Exhibits
| * | Filed herewith. |
| ** | Certain exhibits and schedules have been omitted and the Company agrees to furnish supplementary to the Securities and Exchange Commission a copy of any omitted exhibits upon request. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NEXGEL, INC. | ||
| Date: November 13, 2024 | By: | /s/ Adam Levy |
| Name: | Adam Levy | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| By: | /s/ Adam E. Drapczuk III | |
| Name: | Adam E. Drapczuk III | |
| Title: | Chief Financial Officer | |
| (Principal Financial Officer) | ||
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