UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2022

☐	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: 001-41173

NexGel, Inc.

(Exact name of registrant as specified in its charter)

Delaware		26-4042544
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

2150 Cabot Blvd West, Suite B Langhorne, PA		19047
(Address of principal executive office)		(Zip Code)

Registrant’s telephone number, including area code: (215) 702-8550

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001	NXGL	The Nasdaq Capital Market LLC
Warrants to Purchase Common Stock	NXGLW	The Nasdaq Capital Market LLC

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. Yes ☒ No ☐

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). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated 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 ☐

Non-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 8, 2022, the registrant had 5,572,234 shares of common stock outstanding.

nEXGEL, INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021	4
	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021	7
	Notes to Condensed Consolidated Financial Statements	8

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	28
ITEM 4.	Controls and Procedures	28

PART II – OTHER INFORMATION

ITEM 1.	Legal Proceedings	29
ITEM 1A.	Risk Factors	29
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
ITEM 3.	Defaults Upon Senior Securities	29
ITEM 4.	Mine Safety Disclosures	29
ITEM 5.	Other Information	29
ITEM 6.	Exhibits	30

Signatures		31

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEXGEL, INC

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2022 AND DECEMBER 31, 2021

(Unaudited)

(in thousands, except share and per share data)

	September 30,			December 31,
	2022			2021
ASSETS:
Current Assets:
Cash and cash equivalents	$	1,427		$	13,350
Marketable securities		5,985			-
Accounts receivable, net		265			209
Inventory		399			291
Prepaid expenses and other current assets		239			77
Total current assets		8,315			13,927
Goodwill		311			311
Intangibles, net		23			33
Property and equipment, net		737			723
Operating lease - right of use asset		1,785			1,926
Other assets		63			63
Total assets	$	11,234		$	16,983

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	358		$	254
Accrued expenses and other current liabilities		164			62
Convertible notes payable		-			2,037
Notes payable, current portion		14			10
Warrant liability		372			318
Operating lease liability, current portion		207			207
Total current liabilities		1,115			2,888
Long-Term Liabilities:
Operating lease liability, net of current portion		1,632			1,744
Notes payable, net of current portion		269			266
Total long-term liabilities		1,901			2,010
Total liabilities		3,016			4,898

Commitments and Contingencies (Note 14)		-			-

Preferred Stock, par value $0.001 per share, 5,000,000 shares authorized, no shares issued and outstanding		-			-
Common Stock, par value $0.001 per share, 25,000,000 shares authorized; 5,572,234 shares issued and outstanding as of both September 30, 2022 and December 31, 2021		6			6
Additional paid-in capital		19,122			18,891
Accumulated deficit		(10,910	)		(6,812	)
Total stockholders’ equity		8,218			12,085
Total liabilities and stockholders’ equity	$	11,234		$	16,983

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NEXGEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(Unaudited)

(in thousands, except share and per share data)

	2022			2021			2022			2021
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Revenues, net	$	568		$	335		$	1,524		$	1,018

Cost of revenues		420			392			1,304			1,113

Gross (loss)/profit		148			(57	)		220			(95	)

Operating expenses
Research and development		193			-			328			17
Selling, general and administrative		992			553			2,459			1,571
Total operating expenses		1,185			553			2,787			1,588

Loss from operations		(1,037	)		(610	)		(2,567	)		(1,683	)

Other expense, net
Interest expense		(242	)		(534	)		(1,334	)		(1,052	)
Loss on debt extinguishment		-			-			(150	)		(25	)
Warrant modification expense		(57	)		-			(57	)		-
Debt discount costs		-			-			-			(68	)
Other income		-			-			2			147
Gain on investments in marketable securities		5			-			5			-
Changes in fair value of warrant liability		104			2			3			10
Total other expense, net		(190	)		(532	)		(1,531	)		(988	)
Loss before income taxes		(1,227	)		(1,142	)		(4,098	)		(2,671	)
Income tax expense		-			-			-			-
Net loss	$	(1,227	)	$	(1,142	)		(4,098	)		(2,671	)
Net loss per common share - basic	$	(0.22	)	$	(0.38	)		(0.74	)		(0.91	)
Net loss per common share - diluted	$	(0.22	)	$	(0.38	)		(0.74	)		(0.91	)
Weighted average shares used in computing net loss per common share - basic		5,572,234			2,979,371			5,572,234			2,942,057
Weighted average shares used in computing net loss per common share – diluted		5,572,234			2,979,371			5,572,234			2,942,057

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NEXGEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(Unaudited)

(in thousands, except share data)

	Shares		Amount		Capital		Deficit			Equity
	Common Stock				Additional Paid-in		Accumulated			Total Stockholders’
	Shares		Amount		Capital		Deficit			Equity
Balance, January 1, 2022		5,572,234	$	6	$	18,891	$	(6,812	)	$	12,085

Stock-based compensation		-		-		55		-			55

Net loss		-		-		-		(1,836	)		(1,836	)

Balance, March 31, 2022		5,572,234		6		18,946		(8,648	)		10,304

Stock-based compensation		-		-		54		-			54

Restricted stock vesting		-		-		25		-			25

Net loss		-		-		-		(1,035	)		(1,035	)

Balance, June 30, 2022		5,572,234		6		19,025		(9,683	)		9,348

Stock-based compensation		-		-		55		-			55

Restricted stock vesting		-		-		42		-			42

Net loss		-		-		-		(1,227	)		(1,227	)

Balance, September 30, 2022		5,572,234	$	6	$	19,122	$	(10,910	)	$	8,218

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NEXGEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(Unaudited)

(in thousands, except share data)

	Common Stock				Additional Paid-in			Accumulated			Total Stockholders’
	Shares		Amount		Capital			Deficit			Equity
Balance, January 1, 2021		2,838,047	$	3	$	2,570		$	(2,502	)	$	71

Stock-based compensation		-		-		69			-			69

Restricted stock vesting		-		-		21			-			21

Issuances of common stock, net of issuance costs		101,800		-		285			-			285

Warrants issued for debt issuance		-		-		(18	)		-			(18	)

Beneficial conversion and warrant features of convertible debt		-		-		1,276			-			1,276

Net loss		-		-		-			(704	)		(704	)

Balance, March 31, 2021		2,939,847		3		4,203			(3,206	)		1,000

Stock-based compensation		-		-		74			-			74

Restricted stock vesting		39,524		-		21			-			21

Net loss		-		-		-			(825	)		(825	)

Balance, June 30, 2021		2,979,371		3		4,298			(4,031	)		270

Stock-based compensation		-		-		24			-			24

Restricted stock vesting		-		-		21			-			21

Beneficial conversion and warrant features of convertible debt		-		-		1,311			-			1,311

Net loss		-		-		-			(1,142	)		(1,142	)

Balance, September 30, 2021		2,979,371	$	3	$	5,654		$	(5,173	)	$	484

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NEXGEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(Unaudited)

(in thousands)

	2022			2021
	Nine Months Ended September 30,
	2022			2021
Operating Activities
Net loss	$	(4,098	)	$	(2,671	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		84			206
Changes in ROU asset and operating lease liability		29			16
Share-based compensation		231			229
Changes in fair value of warrant liability		(3	)		(10	)
Amortization of deferred financing costs		1,325			1,058
Warrant modification expense		57			-
Loss on extinguishment of debt		150			25
Gain on investments in marketable securities		(5	)		-
Forgiveness of debt		-			(147	)
Beneficial conversion feature in excess of face value		-			52

Changes in operating assets and liabilities:
Accounts receivable		(56	)		(121	)
Inventory		(108	)		(28	)
Prepaid expenses and other current assets		(162	)		39
Accounts payable		104			(145	)
Accrued expenses and other current liabilities		109			(21	)
Deferred revenue		-			(38	)

Net Cash Used in Operating Activities		(2,343	)		(1,556	)

Investing Activities
Investment in marketable securities		(6,980	)		-
Proceeds from sale of marketable securities		1,000			-
Capital expenditures		(88	)		(390	)
Net Cash Used in Investing Activities		(6,068	)		(390	)

Financing Activities
Issuance of common stock, net of issuance costs		-			285
Proceeds from notes payable		-			15
Principal payment of notes payable		(3,512	)		-
Proceeds from notes payable (PPP)		-			127
Proceeds from convertible notes		-			2,957
Payment of financing costs		-			(115	)
Principal payment on convertible notes		-			(100	)
Net Cash Provided by (Used In) Financing Activities		(3,512	)		3,169
Net Increase (Decrease) in Cash and Cash Equivalents		(11,923	)		1,223
Cash and Cash Equivalents – Beginning of period		13,350			32
Cash and Cash Equivalents – End of period	$	1,427		$	1,255
Supplemental Disclosure of Cash Flows Information
Cash paid during the year for:
Interest		-			-
Taxes		-			-

Supplemental Non-cash Investing and Financing Activities
Fair value of beneficial conversion and warrant features of convertible notes payable	$	-		$	2,587
Original issue discounts recognized on convertible notes payable	$	-		$	653
Warrants issued for debt and equity financing costs	$	-		$	203
Operating lease, ROU assets and liabilities	$	-		$	2,050

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NEXGEL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

1. Description of Business, the Spin-off and Basis of Presentation

Description of Business

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. NexGel has historically served as a contract manufacturer, supplying our gels to third parties who incorporate them into their own products, and have recently began producing the Company’s own consumer products using our gels focused on proprietary branded products and white label opportunities. Both the Company’s gels and consumer products are manufactured using proprietary and non-proprietary mixing, coating and cross-linking technologies. Together, these technologies enable NexGel 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, the Company has the manufacturing capability to offer broad choices in the selection of liners onto which the gels are coated. Consequently, NexGel and our 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.

The condensed consolidated financial statements include the accounts of the Company and its consolidated wholly-owned subsidiary, NexGelRx, Inc.

Stock Split

On November 29, 2021, the Company effected a 1-for-35 reverse stock split of our issued and outstanding common stock (the “Reverse Stock Split”). As a result of the Reverse Stock Split, each issued and outstanding share of our common stock, and the per share exercise price of and number of shares of the Company’s common stock underlying our outstanding equity awards and warrants, was automatically proportionally adjusted based on the 1-for-35 Reverse Stock Split ratio. No fractional shares of common stock were issued in connection with the reverse stock split, and all such fractional interests were rounded up to the nearest whole number.

Except as otherwise provided herein, all share and per-share amounts of our common stock, equity awards and warrants, including the shares of common stock and warrants being offered hereby, have been adjusted to give effect to the Reverse Stock Split for all periods presented. The Reverse Stock Split did not alter the par value of the Company’s common stock, which remains at $0.001 per share, modify any voting rights or other terms of our common stock, or impact the amount of preferred stock the Company is authorized to issue.

Basis of Presentation

The accompanying interim unaudited condensed 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 (the “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 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, 2022. These financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

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2. Going Concern

As of September 30, 2022, the Company had a cash balance of $1.4 million (including cash equivalents) and $6.0 million of marketable securities (see Note 3 for details of our marketable securities). For the nine months ended September 30, 2022, the Company incurred a net loss of $4.1 million and had a net usage of cash in operating activities of $2.3 million. In addition, the Company had a working capital of $7.2 million as of September 30, 2022. Additionally, we believe we have sufficient cash and marketable securities to operate our business plan through 2024.

On December 27, 2021, the Company sold an aggregate of 2,585,000 units at a price to the public of $5.50 per unit (the “Offering”), each unit consisting of one share of the Company’s common stock, par value $0.001 per share (the “Common Stock”), and a warrant to purchase one share of Common Stock at an exercise price of $5.50 per share (the “Warrants”), for net proceeds of $14.2 million.

Proceeds from the Offering are expected to be used for working capital, new product development and testing, and general business operations.

Management is exploring new product channel sales in adjacent industries, such as cosmetics, athletic products, and proprietary medical devices. The Company has increased focused 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 have sufficient capital to maintain as a going concern due to the capital raise that occurred on December 27, 2021. We intend to maintain and attempt to grow our existing contract manufacturing business. We also plan to continue building and developing our catalog 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 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 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 consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates and assumptions include an allowances for doubtful accounts, 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.

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Reclassifications

We have reclassified, combined or separately disclosed certain amounts in the prior years’ condensed consolidated financial statements and accompanying footnotes to conform with the current period’s presentation.

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. Cash equivalents consist of investments in money market funds for which the carrying amount approximates fair value, due to the short maturities of these investments.

Marketable Securities

The Company classifies its marketable securities as held-to-maturity, which include U.S. treasury bills with original maturities of greater than three months. These securities are carried at cost. The total unrecognized gain related to the marketable securities was inconsequential during the nine months ended September 30, 2022.

Schedule of Marketable Securities

	September 30, 2022
Marketable Securities
United States treasury bills (due December 29, 2022)	$	494
United States treasury bills (due February 23, 2023)		492
United States treasury bills (due June 15, 2023)		4,387
United States treasury bills (due July 13, 2023)		127
United States treasury bills (due August 10, 2023)		485
Total	$	5,985

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 doubtful accounts based on factors including the length of time the receivables are past due, the current business environment and the Company’s historical experience. 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 doubtful accounts was $10 thousand as of September 30, 2022 and $4 thousand as of December 31, 2021.

Inventory and Cost of Revenues

Inventory 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 balance is made up of raw materials, work-in-progress, and finished goods of $285 thousand, $87 thousand, and $27 thousand on September 30, 2022, respectively, and the balance was made up of raw materials, work-in-progress, and finished goods of $266 thousand, $0, and $25 thousand on December 31, 2021, respectively. Inventory is maintained at the Company’s warehouse and at an Amazon fulfillment center.

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.

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The “Cost of Revenues” line item in the 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.

Shipping and Handling Revenue and Expense

Shipping and handling revenue and expense are included in our consolidated statements of operations in Revenue and Cost of revenues, respectively. This is primarily through shipping fees incurred in the Amazon marketplace.

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 period of disposal and the resulting gains and losses are included in the results of operations during the same period.

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 acquisitions or annually as of December 31, and whenever indicators of impairment exist. The fair value of intangible assets are 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.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets is recorded at historical cost and is primarily made up of $98 thousand and $23 thousand of prepaid insurance, and $141 thousand and $54 thousand general prepaid expenses and other current assets as of September 30, 2022 and December 31, 2021, respectively.

Other Assets

Other assets is recorded at historical costs, and as of September 30, 2022 and December 31, 2021, the balance is primarily made up of spare parts for manufacturing equipment. Spare parts are stated at cost and are not subject to depreciation, until such time that they are placed into service and the part that is being replaced is disposed.

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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 balance sheet to approximate fair value because of the short-term or highly liquid nature of these financial instruments.

The following table sets forth the fair value of the Company’s financial assets within the fair value hierarchy:

	Level 1		Level 2		Level 3		Fair Value
	September 30, 2022
	Level 1		Level 2		Level 3		Fair Value
Assets
Marketable securities:
United States treasury bills	$	5,985	$	—	$	—	$	5,985
Total	$	5,985	$	—	$	—	$	5,985

Warrant Liability

Warrants to purchase common stock were issued in connection with equity financing raises, which occurred on September 2, 2021, March 11, 2021, February 3, 2021, December 24, 2020, March 18, 2020, September 10, 2019 and November 6, 2019. The fair values of the warrants are estimated as of the date of issuance and again at each period end using a Black-Scholes option valuation model. At issuance, the fair values of the warrants 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 statements of operations.

Revenue Recognition

On January 1, 2018, the Company adopted Accounting Standards Codification (“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 adopted ASC 606 for all applicable contracts using the modified retrospective method, which would have required a cumulative-effect adjustment, if any, as of the date of adoption. The adoption of ASC 606 did not have a material impact on the Company’s consolidated financial statements as of the date of adoption. As a result, a cumulative-effect adjustment was not required.

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The Company currently recognizes revenue predominately from three types of revenue, contract manufacturing, custom and white label finished goods manufacturing and our branded products. Revenues from manufactured products 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.

The Company’s customers consist of other life sciences companies and Amazon retail customers. Revenues are entirely concentrated in the United States. Payment terms 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.

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.

Disaggregated revenue by sales type:

	2022		2021
	Three months ending
	September 30,
	2022		2021
Contract manufacturing	$	277	$	180
Custom and white label finished goods manufacturing		15		-
NexGel branded consumer products		231		155
Other		45		-
Total	$	568	$	335

	2022		2021
	Nine months ending
	September 30,
	2022		2021
Contract manufacturing	$	736	$	559
Custom and white label finished goods manufacturing		34		194
NexGel branded consumer products		623		265
Other		131		—
Total	$	1,524	$	1,018

As of September 30, 2022 and December 31, 2021, the Company did not have any contract assets or contract liabilities from contracts with customers. As of September 30, 2022 and December 31, 2021, there were no remaining performance obligations that the Company had not satisfied.

Share-based Compensation

On August 28, 2019, the Company adopted the 2019 Long-Term Incentive Plan, as amended (the “2019 Plan”). See Note 10 below for further details regarding the 2019 Plan.

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 statements of operations on a straight-line basis over the requisite service period, which is generally the vesting period required to obtain full vesting. Forfeitures are accounted for when they occur.

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In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-07, Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting. These amendments expand the scope of Topic 718, Compensation - Stock Compensation, to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. This new standard is effective for the Company on January 1, 2020. The Company early adopted this new standard in the third quarter of 2019 and it did not have material impact to its consolidated financial statements.

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.

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 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 is currently evaluating the impact the adoption of ASU 2016-13 will have on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under the amendments in ASU 2017-04, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU 2017-04 requires any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. We adopted ASU 2017-04 effective January 1, 2021.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 on a prospective basis, with early adoption permitted. We adopted ASU 2019-12 effective January 1, 2021 and the adoption of this guidance did not have a material impact on our consolidated financial statements.

4. Leases

The Company has one operating lease for a commercial manufacturing facility and administrative offices located in Langhorne, Pennsylvania that runs through January 2031.

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The following table presents information about the amount and timing of the liability arising from the Company’s operating lease as of September 30, 2022 ($ in thousands):

	Operating
	Lease
Maturity of Lease Liability	Liability
2022	$	52
2023		207
2024		207
2025		207
2026		263
Thereafter		1,165
Total undiscounted operating lease payments	$	2,101
Less: Imputed interest		(262	)
Present value of operating lease liability	$	1,839
Weighted average remaining lease term		8.25 years
Weighted average discount rate		3.0	%

Total operating lease expense for the nine months ending September 30, 2022 and 2021 was $155 thousand and $192 thousand, respectively, and is recorded in cost of revenues and selling, general and administrative expenses on the statement of operations.

Supplemental cash flows information related to leases was as follows ($ in thousands):

	September 30,
	2022
Cash paid for amounts included in the measurement of lease liability:
Operating cash flows from operating lease	$	155

5. Inventory

Inventory consists of the following ($ in thousands):

Schedule of Inventory

	September 30,		December 31,
	2022		2021
Raw materials	$	285	$	266
Work-in-progress		87		-
Finished goods		27		25
Inventory, gross		399		291
Less: Inventory reserve for excess and slow moving inventory		—		—
Total	$	399	$	291

Inventory is maintained at the Company’s warehouse and at an Amazon fulfillment center. The Company builds its contract manufacturing products based on customer orders and immediately ships the products upon completion of the production process.

6. Property and Equipment, Net

Property and equipment consist of the following ($ in thousands):

Schedule of Property and Equipment

	Useful Life		September 30,			December 31,
	(Years)		2022			2021
Machinery and equipment		3 - 10	$	972		$	940
Office furniture and equipment		3 - 10		59			50
Leasehold improvements		6		228			228
Construction in progress		-		48			-
Property and equipment, gross				1,307			1,218
Less: accumulated depreciation and amortization				(570	)		(495	)
Property and equipment, net			$	737		$	723

Depreciation expense for the nine months ended September 30, 2022 and 2021 was $74 thousand and $75 thousand, respectively.

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7. Intangible Assets

The following provides a breakdown of identifiable intangible assets as of September 30, 2022 and December 31, 2021 ($ in thousands):

	September 30,			December 31,
	2022			2021
Product/Technology Related
Identifiable intangible assets, gross	$	31		$	31
Accumulated amortization		(24	)		(16	)
Product/Technology related identifiable intangible assets, net		7			15
Marketing Related
Customer related intangible asset, gross		17			17
Tradename related intangible asset, gross		7			7
Accumulated amortization		(8	)		(6	)
Marketing related identifiable intangible assets, net		16			18
Total identifiable intangible assets, net	$	23		$	33

In connection with the acquisition of Sport Defense in 2020, the Company identified intangible assets of $55 thousand representing technology related and customer related intangibles. These assets are being amortized on a straight-line basis over their weighted average estimated useful life of 3.7 years and amortization expense amounted to $10 thousand for each of the nine months periods ended September 30, 2022 and 2021.

As of September 30, 2022, the estimated annual amortization expense for each of the next five fiscal years is as follows ($ in thousands):


2022 (reminder of the year)	$	4
2023		8
2024		2
2025		2
2026		2
Thereafter		5
Total	$	23

8. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following ($ in thousands):

	September 30,		December 31,
	2022		2021
Salaries, benefits, and incentive compensation	$	48	$	54
Franchise tax accrual		107		-
Other		9		8
Total accrued expenses and other current liabilities	$	164	$	62

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9. Common Stock

Share issuances

In connection with the Offering on December 27, 2021, the Company sold an aggregate of 2,585,000 units at a price to the public of $5.50 per unit, each unit consisting of one share of our common stock, and a warrant to purchase one share of our common stock at an exercise price of $5.50 per share. In addition, the Company granted the underwriter with respect to the Offering a 45-day option to purchase up to 387,750 additional shares of our common stock, and/or 387,750 additional warrants, to cover over-allotments in connection with the Offering, which the Underwriter partially exercised to purchase 387,750 warrants on December 27, 2021.

From January 1, 2021 through March 31, 2021, the Company entered into Securities Purchase Agreements with certain accredited investors whereby we sold 101,800 shares of our common stock at a price per share equal to $2.80 for an aggregate purchase price of $285 thousand.

At September 30, 2022, the Company has reserved common stock for issuance in relation to the following:

Share-based compensation plan			329,937
Warrants to purchase common stock			3,637,190

10. Share-based Compensation

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 57,143 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 57,143 shares of common stock to 485,715 and from 485,715 shares of common stock to 571,429 shares of common stock, all of which may be delivered pursuant to incentive stock options. Subject to adjustments pursuant to the 2019 Plan, the maximum number of shares of common stock with respect to which stock options or SARs may be granted to an executive officer during any calendar year is 14,286 shares of common stock.

Incentive stock options

The following table contains information about the 2019 Plan as of September 30, 2022:

Awards

Reserved for

Awards

Available for

Issuance

Issued

Exercised

Grant

2019 Plan

571,429

329,937

7,183

234,309

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The following table summarizes the Company’s incentive stock option activity and related information for the period ended September 30, 2022:

						Weighted
				Weighted		Average
				Average		Contractual
	Number of			Exercise		Term in
	Options			Price		Years
Outstanding at January 1, 2022		434,939		$	1.675747		8.56

Granted		—			—		—
Exercised		—			—		—
Forfeited		—			—		—
Cancelled		(105,002	)		1.40		—
Expired		—			—		—
Outstanding at September 30, 2022		329,937		$	1.763503		7.83
Exercisable at September 30, 2022		318,508		$	1.726311		7.81

As of September 30, 2022, vested outstanding stock options had $169 thousand intrinsic value as the exercise price is greater than the estimated fair value of the underlying common stock. As of September 30, 2022, there was approximately $85 thousand of total unrecognized share-based compensation related to unvested stock options, which the Company expects to recognize over the next 12 months.

The Company recognizes compensation expense for stock option awards on a straight-line basis over the applicable service period of the award. The service period is generally the vesting period. The following assumptions were used to calculate share-based compensation expense for year ended September 30, 2022:

Volatility	171.12%-183.48		%
Risk-free interest rate		0.46% - 0.86	%
Dividend yield		0.0	%
Expected term		5.0 - 5.75 years

The Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior. Accordingly, the Company has elected to use the “simplified method” to estimate the expected term of its share-based awards. The simplified method computes the expected term as the sum of the award’s vesting term plus the original contractual term divided by two.

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.

Restrictive stock awards

Effective as of August 1, 2022, the Company granted a restricted stock award of 84,750 shares of the Company’s common stock to the certain officers and employees, all of which shares vest in four equal installments on each of January 1, 2023, January 1, 2024, January 1, 2025 and January 1, 2026. Under ASC 718, Compensation-Stock Compensation (“ASC 718”), the Company has measured the value of the 84,750 shares granted based on the closing price of the Company’s stock at the grant date of the RSU Grant ($1.82 per share).

Effective as of January 1, 2022, the Company granted a restricted stock award of 11,364 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 November 4, 2021, all of which shares vested monthly from January 1, 2022 through December 31, 2022. Under ASC 718, the Company has measured the value of the 11,364 shares granted based on the closing price of the Company’s stock at the grant date of the RSU Grant ($4.40 per share).

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On March 8, 2021, the Company granted a restricted stock award of 39,524 shares of the Company’s common stock to Adam Levy for his service as our Chief Executive Officer and Chief Financial Officer from October 1, 2020 through September 30, 2021, all of which shares vested immediately. Under ASC 718, the Company has measured the value of the 39,524 shares granted based on the closing price of the Company’s stock at the grant date of the RSU Grant ($2.10 per share).

			Weighted
			Average
	Number of		Grant Date
	Units		Fair Value
Outstanding at January 1, 2022		—	$	—
Granted		96,114		1.60
Exercised and converted to common shares		—		—
Forfeited		—		—
Outstanding at September 30, 2022		96,114	$	1.60
Exercisable at September 30, 2022		8,523	$	4.40

Warrants

The following table shows a summary of common stock warrants through September 30, 2022:

Summary of Common Stock Warrants

			Weighted		Weighted
			Average		Average
	Number of		Exercise		Contractual
	Warrants		Price		Term in Years
Outstanding at January 1, 2022		3,637,190	$	5.16281		4.63
Granted		—		—		—
Exercised		—		—		—
Forfeited		—		—		—
Cancelled		—		—		—
Expired		—		—		—
Outstanding at September 30, 2022		3,637,190	$	5.16281		3.90
Exercisable at September 30, 2022		3,637,190	$	5.16281		3.90

As of September 30, 2022, vested outstanding warrants had $158 thousand intrinsic value as the exercise price is greater than the estimated fair value of the underlying common stock.

11. Notes Payable

PPP Loan

On April 22, 2020, the Company, entered into a promissory note with PNC Bank, N.A. (the “PNC Bank”), which provides for a loan in the amount of $147,300 (the “PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act. On March 4, 2021, the Company received a second PPP Loan in the amount of $127,400 thousand under Phase II of the Paycheck Protection Program. On June 2, 2021, the Company received notice from PNC Bank that its initial loan of $147,300 had been forgiven in its entirety by the Small Business Administration (“SBA”). On November 16, 2021, the Company received notice from PNC Bank that its second PPP loan of $127,400 had been forgiven in its entirety by the SBA.

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 $260,500, with proceeds to be used for working capital purposes. Interest accrues at the rate of 3.75% per annum. Installment payments, including principal and interest, are due monthly beginning May 28, 2021 (twelve months from the date of the SBA Note) in the amount of $1,270. The balance of principal and interest is payable thirty years from the date of the SBA Note. In connection therewith, the Company received an $8 thousand advance, which does not have to be repaid. On March 26, 2021, the SBA announced that all EIDL loans issued in 2020 will start repayment 24 months from the date of the SBA Note. The SBA has since extended the repayment start to 30 months from the date of the SBA Note. The balances of the principal and accrued interest amounted to $283 thousand and $276 thousand as of September 30, 2022 and December 31, 2021, respectively.

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12. Convertible Notes Payable

On December 24, 2020, the Company issued a $100 thousand 6% Secured Convertible Promissory Note which was convertible into shares of the Company’s common stock at a price per share of $2.80. The note was fully repaid (including all accrued but unpaid interest) on March 14, 2021.

On January 19, 2021, the Company issued a $15 thousand Secured Convertible Promissory Note which was convertible into shares of the Company’s common stock at a price per share of $1.05. The note was fully repaid (including all accrued but unpaid interest) on March 14, 2021.

Auctus Fund Financing

On March 11, 2021, the Company and Auctus Fund, LLC, a Delaware limited liability company (“Auctus”) entered into a senior secured convertible promissory note in the principal amount of $1,680 thousand, which includes $180 thousand of interest which was deemed fully earned as of the issuance date (the “Auctus Note”). The Auctus Note was fully repaid (including all principal and interest) on March 15, 2022 with a one-time cash payment of $1,680 thousand.

Investor Private Placement Offering

On September 2, 2021, the Company closed a private placement offering with twenty accredited investors (the “September 2 Investors”) whereby the Company issued to the September 2 Investors subordinated secured convertible promissory notes in the aggregate principal amount of $1,814 thousand, which includes $194 thousand of interest which was deemed fully earned as of the issuance date (the “September 2 Notes”).

SEC Form 10-Q filed by NexGel Inc