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.
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.
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.
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 $
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.
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:
Schedule
of Fair Value of Financial Assets
| |
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.
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:
Schedule
of 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.
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.
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):
Schedule
of Future Minimum Lease Payments
| |
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):
Schedule
of Supplemental
Cash Flows Information Related to Leases
|
|
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 $75 thousand, respectively.
7.
Intangible Assets
The
following provides a breakdown of identifiable intangible assets as of September 30, 2022 and December 31, 2021 ($ in thousands):
Schedule
of Breakdown of Identifiable Intangible Assets
| |
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):
Schedule
of Estimated Annual Amortization Expense
|
|
|
|
|
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):
Schedule
of Accrued
Expenses and Other Current Liabilities
|
|
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 |
|
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:
Schedule
of Reserved Common Stock For Issuance in Relation
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:
Schedule
of Information about Incentive Plan
| |
Awards | | |
| | |
| | |
Awards | |
| |
Reserved for | | |
Awards | | |
Awards | | |
Available for | |
| |
Issuance | | |
Issued | | |
Exercised | | |
Grant | |
2019 Plan | |
| 571,429 | | |
| 329,937 | | |
| 7,183 | | |
| 234,309 | |
The
following table summarizes the Company’s incentive stock option activity and related information for the period ended September
30, 2022:
Schedule of Incentive Stock Option Activity
| |
| | |
| | |
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:
Schedule
of Assumptions used in Share-based Compensation
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).
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).
Schedule
of Restricted Stock Units Grant
| |
| | |
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.
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”).
On
January 25, 2022, the Company repaid a September 2 Investor in full with a one-time cash payment of $300 thousand
of outstanding principal and accrued but unpaid interest. The Company did incur a 105%
pre-payment penalty of $16,800
with respect to the repayment of the investor’s note and the repayment extinguished the note in its entirety.
On
September 6, 2022, the September 2 Notes remaining outstanding balance was repaid in full which consisted of principal and interest
of $1,478 thousand.
13.
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 22,019, 34,286, 7,428, 7,286, 44,286, 35,714 and 114,286 warrants, respectively, as equity issuance consideration, in
connection with a private placement of the Company’s common stock. The warrants entitle the holder to purchase one share of our
common stock at an exercise price equal to $0.49 to $5.25 per share at any time on or after their issuance date and on or prior to the
close of business 3 years after the issuance date (the “Termination Date”). The Company determined that these warrants are
free standing financial instruments that are legally detachable and separately exercisable from the common stock included in the public
share offering. Management also determined that the warrants required classification as a liability pursuant to ASC 815, Derivatives
and Hedging. In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant liability on the balance
sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded
as a component of other expense, net in the statement of operations.
On
September 6, 2022, the Company agreed to extend the September 10, 2019 and November 6, 2019 warrants an additional six months until March
9, 2023 and May 5, 2023, respectively. The warrants were remeasured as of September 6, 2022 and consequently resulted in a warrant modification
expense of $57 thousand.
The
warrants outstanding and fair values at each of the respective valuation dates are summarized below:
Schedule of Warrant Liability
| |
Warrants | | |
Fair Value | | |
| |
Warrant Liability | |
Outstanding | | |
per Share | | |
Fair Value | |
Fair Value as of period ending 12/31/2021 | |
| 265,305 | | |
| | | |
$ | 318 | |
Modification of warrants | |
| | | |
| | | |
| 57 | |
Change in fair value of warrant liability | |
| | | |
| | | |
| (3 | ) |
Fair Value as of period ending 9/30/2022 | |
| 265,305 | | |
| | | |
$ | 372 | |
The
warrant liabilities are considered Level 3 liabilities on the fair value hierarchy as the determination of fair value includes various
assumptions about future activities and the Company’s stock prices and historical volatility of other comparable public companies
used as inputs. As of September 30, 2022, none of the warrants have been exercised.
14.
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 financial position, results of operations, or cash flows of the Company.
15.
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 two customers that exceeded 10% of total revenues for the nine months ended September 30, 2022 were 39% and 27%. The accounts receivable
from the top two customers by revenue were 6%, and 53%, respectively, as well as 17% and 19% from two other customers of the total accounts
receivable as of September 30, 2022.
Revenues
from three customers that exceeded 10% of total revenues for the nine months ended September 30, 2021 were 33%, 38%, and 24%. The accounts
receivable from the top three customers by revenue were 16%, 17%, and 0%, respectively, as well as 18% from one other customer of the
total accounts receivable as of September 30, 2021.
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 $250 thousand. As of September 30, 2022, the total amount exceeding such limit was $1,156 thousand. The Company has not experienced
any credit losses associated with its cash balances in the past. The Company invests its cash equivalents in U.S. treasury bills with
original maturities of three months or less.
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.