Nexgel, Inc.: Form 10-Q for the period ended Jun 30, 2025

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;
• adverse federal, state and local government regulation;
• technological obsolescence of our manufacturing process and equipment;

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• 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 this Quarterly Report on Form 10-Q. 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.

There may be other factors that may cause our actual results to differ materially from the forward-looking statements, including factors disclosed under the section titled and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this information statement. You should evaluate all forward-looking statements made in this information statement in the context of these risks and uncertainties.

No assurance can be given that any goal or plan set forth in any forward-looking statement can or will be achieved, and readers are cautioned not to place undue reliance on such statements which speak only as of the date they are made. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date of this information statement or to reflect the occurrence of unanticipated events, except as required by law.

Overview

We manufacture 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. In May 2023, we formed a joint venture with CG Laboratories, Inc. called CG Converting and Packaging, LLC, which is located in Granbury, Texas and of which we own a 50% interest, allowing us to expand our ability to deliver finished goods to our growing customer base.

We have four distinct lines of business; Contract Manufacturing, Custom & White Label, Consumer Branded Products, and Medical Devices/Other, which are described below.

Contract Manufacturing

Customers order rolls of gel (“rollstock”). The rollstock is shipped to our customers, which they package into finished goods. Historically, this was the Company’s primary source of revenue.

Custom & 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 salable 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 an order for newly developed product.

Consumer Branded Products

These products are finished goods marketed and sold directly to consumers by the Company through online and retail channels. We are responsible for sales, marketing, and distribution. The products we sell under our MedaGel brand primarily relate to healthcare over-the-counter (“OTC”) remedy solutions, such as blister and applications. In December 2023 we added a second consumer product brand when we completed the purchase of the Kenkoderm brand. The Kenkoderm skincare line was originally developed by a dermatologist to provide gentle to the skin products for consumer with psoriasis. In May 2024, we added our third consumer product brand with the purchase of the Silly George brand. Silly George is a beauty brand primarily focused on false eyelashes and other eye related products. We continue to look for additional potential acquisitions as part of our consumer product ‘roll-up” strategy.

Medical Devices/Other

Medical Devices are a hybrid business, combining elements of Custom & White Label and Consumer Branded Products. Medical Devices, which are not yet marketed, are expected to be distributed through strategic partnerships. We 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 us, 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 Spotify stores.

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 June 30, 2025 and 2024 ($ in thousands)

Revenues, net.

For the three months ended June 30, 2025 revenues were $2,884 and increased by $1,444, or 100.3%, when compared to $1,440 for the three months ended June 30, 2024. The increase in our overall revenues was primarily due to sales growth in both our contract manufacturing and branded products.

Gross profit (loss). Our gross profit was $1,258 for the three months ended June 30, 2025 compared to a gross profit of $293 for the three months ended June 30, 2024. The increase of $965 in gross profit quarter over quarter was primarily due to the increase in consumer branded products. Gross profit was 43.6% for the three months ended June 30, 2025 compared to a gross profit of 20.3% for the three months ended June 30, 2024.

The components of cost of revenues are as follows for the three months ended June 30, 2025 and 2024 ($ in thousands):

Cost of revenues increased by $479, or 41.8%, to $1,626 for the three months ended June 30, 2025, as compared to $1,147 for the three months ended June 30, 2024. The increase in cost of revenues is primarily aligned with sales of branded consumer products, as Silly George was acquired in May of 2024 and costs have increased $289 or 333% for this product.

Selling, general and administrative expenses. The following table highlights Selling, general and administrative expenses by type for the three months ended June 30, 2025 and 2024 ($ in thousands):

Selling, general and administrative expenses increased by $623, or 49.0%, to $1,894 for the three months ended June 30, 2025, as compared to $1,271 for the three months ended June 30, 2024. The increase in Selling, general and administrative expenses is primarily attributable to the factors described below.

Compensation and benefits increased by $135, or 53.6%, to $387 for the three months ended June 30, 2025, as compared to $252 for the three months ended June 30, 2024. The number of employees increased compared to the prior period and officer compensation increased in conjunction with contract renewals.

Share-based compensation increased by $70, or 132.1%, to $123 for the three months ended June 30, 2025, as compared to $53 for the three months ended June 30, 2024. The share-based compensation increase is related to the issuance of stock options and restricted awards to our officers, employees, and advisors compared to the same prior year period.

Advertising, marketing, Amazon fees increased by $296 or 91.1%, to $621 for the three months ended June 30, 2025, as compared to $325 for the three months ended June 30, 2024. The increase primarily pertains to an increase in consumer branded product sales year over year.

Investor and shareholder services increased by $24, or 27.3%, to $112 for the three months ended June 30, 2025, as compared to $88 for the three months ended June 30, 2024. The increase is due to an increase of investor services compared to the prior year period.

Franchise taxes and corporate insurance decreased by $13, or 59.1%, to $35 for the three months ended June 30, 2025, as compared to $22 thousand for the three months ended June 30, 2024.

Professional and consulting fees increased by $20, or 5.0%, to $421 for the three months ended June 30, 2025, as compared to $401 for the three months ended June 30, 2024. We continued to incur accounting and consulting fees associated with public company governance requirements.

Other Expenses increased by $75, or 96.1%, to $153 for the three months ended June 30, 2025 from $78 for the three months ended June 30, 2024. Other Selling, general and administrative expenses generally consist of costs associated with our selling efforts and general management, including information technology, travel, training and recruiting.

Research and development expenses. Research and development expenses were $0 and $76 for the three months ended June 30, 2025 and June 30, 2024, respectively.

Comparison of the Six Months ended June 30, 2025 and 2024 (in thousands)

Revenues, net

For the six months ended June 30, 2025, revenues were $5,690 and increased by $2,984, or 110.3%, when compared to $2,706 for the six months ended June 30, 2024. The increase in our overall revenues was primarily due to sales growth in our branded consumer products, and the prior year period included gross revenue for a partial year from Silly George of $380 from May 15, 2024 through June 30, 2024.

Gross profit. Our gross profit was $2,446 for the six months ended June 30, 2025, compared to a gross profit of $519 for the six months ended June 30, 2024. The increase of $1,927 in gross profit recorded for the six months ended June 30, 2025, as compared to the six months ended June 30, 2024, was primarily due to increase in branded consumer products. Gross profit was approximately 43.0% for the six months ended June 30, 2025, compared to a gross profit of 19.2% for the six months ended June 30, 2024.

The components of cost of revenues are as follows for the six months ended June 30, 2025 and 2024 ($ in thousands):

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Cost of revenues increased by $1,057, or 48.3%, to $3,244 for the six months ended June 30, 2025, as compared to $2,187 for the six months ended June 30, 2024. 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 and the acquisition of Silly George in the prior year period which increased by 333%.

Selling, general, and administrative expenses. The following table highlights selling, general, and administrative expenses by type for the six months ended June 30, 2025 and 2024 ($ in thousands):

Selling, general, and administrative expenses increased by $1,492, or 63.1%, to $3,858 for the six months ended June 30, 2025, as compared to $2,366 for the six months ended June 30, 2024. 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 $238, or 47.2%, to $742 for the six months ended June 30, 2025, as compared to $504 for the six months ended June 30, 2024. The number of employees increased compared to the prior period and officer compensation increased in conjunction with contract renewals.

Share-based compensation increased by $180, or 173.1%, to $284 for the six months ended June 30, 2025, as compared to $104 for the six months ended June 30, 2024. 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 $736 or 139.7%, to $1,263 for the six months ended June 30, 2025, as compared to $527 for the six months ended June 30, 2024. 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 increased by $26 or 17.3%, to $176 for the six months ended June 30, 2025, as compared to $150 for the six months ended June 30, 2024. The increase is due to a net increase of investor services compared to the prior year period.

Franchise taxes and corporate insurance decreased by $16 or 20.0%, to $64 for the six months ended June 30, 2025, as compared to $80 for the six months ended June 30, 2024. In the prior year period, a non-recurring adjustment resulted in an decrease in franchise taxes.

Professional and consulting fees increased by $162 or 21.2% to $927 for the six months ended June 30, 2025, as compared to $765 for the six months ended June 30, 2024. We continued to incur accounting and consulting fees associated with public company governance requirements. Additionally, we incurred significant expenses related to our European Medical Device Regulation project in preparation for entering European markets.

Other expenses increased by $165, or 107.8%, to $318 for the six months ended June 30, 2025 from $153 for the six months ended June 30, 2024. 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 $77, or 98.7% to $1 for the six months ended June 30, 2025 from $78 for the six months ended June 30, 2024. Research and development expenses are related to research costs incurred for potential products for existing or new customers.

Liquidity and Capital Resources ($ in thousands)

Cash Flow (in thousands)

As of June 30, 2025, we had $725 of cash and cash equivalents, compared to $1,807 of cash and cash equivalents at December 31, 2024. Net cash used in operating activities was $807 and $1,792 for the six months ended June 30, 2025 and 2024, respectively.

Net cash used in investing activities was $20 and net cash used in investing activities was $704 for the six months ended June 30, 2025 and 2024, respectively, consisting of purchases of capital equipment of $20 for the six months ending June 30, 2025 and consisting of the sales of marketable securities of $57, the purchase of capital equipment of $361 and the acquisition of $400 for six months ended June 30, 2024

Net cash used in financing activities for the six months ended June 30, 2025 was $255 is attributable to the principal payments of notes payable and principal payments of financing lease liabilities and payment of contingent consideration of $178. Net cash provided by financing activities for the six months ended June 30, 2024 was $865 consisting of net proceeds from the RDO of $946 and an investment of $37 by a joint venture partner, offset by principal payments of notes payable of $27, a change in contingent consideration liability of $69, and by principal payment on financing lease liability of $22.

At June 30, 2025, current assets totaled $4,162 and current liabilities totaled $2,396, as compared to current assets totaling $5,114 and current liabilities totaling $2,470 at December 31, 2024. As a result, we had working capital of $1,766 at June 30, 2025, compared to a working capital of $2,644 at December 31, 2024. The change in the working capital as of June 30, 2025 is primarily attributable to the loss from operations of $1,413.

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.

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 August Financing provides working capital necessary to continue our strategic objectives (discussed further within Note 20). 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 June 30, 2025, 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.

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.

Disclosure Controls and Procedures.

As of June 30, 2025, 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 “Exchange Act”). 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 and Procedures were not effective as of June 30, 2025, due to material weaknesses in our internal control over financial reporting, which are described below.

Specifically, management has concluded that its internal control over financial reporting was not effective as of June 30, 2025 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America due to the following: (i) we have not designed controls to ensure all accounting journals entries are reviewed and approved and (ii) we identified one individual in our accounting department who has “super user” access and security administration rights to the financial reporting systems. To remediate these material weaknesses, we are working to do the following: (i) implementing appropriate controls for accounting journal entry approvals, including the approval of our Chief Financial Officer, and (ii) either actively monitoring any accounting user with elevated rights or assigning another employee outside of an accounting and reporting role with elevated access. We expect to complete these remediation efforts by December 31, 2025.

Additionally, we have not designed controls to ensure the financial reporting process is operating effectively. We noted improper fair value adjustments to contingent consideration, failure to record adequate inventory reserves and various balance sheet accounts not being properly reconciled. We intend to design controls to ensure the financial information is accurate, complete, and recorded in the correct period.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the fiscal quarter ended June 30, 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2024 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 year 2025 to the risk factors that were included in the Form 10-K.