NEXGEL, Inc. (NASDAQ:NXGL) Q1 2024 Earnings Call Transcript

NEXGEL, Inc. (NASDAQ:NXGL) Q1 2024 Earnings Call Transcript May 13, 2024

Operator: Good afternoon, everyone. My name is Beau, and I will be your conference operator today. At this time, I would like to welcome everyone to NEXGEL’s First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer section. [Operator Instructions] Also, today’s call is being recorded, and I will be standing by if anyone should need any assistance. And now at this time, I’d like to turn the call over to Valter Pinto, Managing Director of KCSA Strategic Communications for introductions. Please go ahead, sir.

Valter Pinto: Thank you, operator. Good afternoon, and welcome, everyone, to NEXGEL’s first quarter 2024 financial results conference call. I’m joined today by Adam Levy, Chief Executive Officer; Adam Drapczuk, Chief Financial Officer. Before we begin, I’d like to remind everyone that statements made during today’s conference call may be deemed forward-looking statements within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties and other factors. For a detailed discussion of some of the ongoing risks and uncertainties in the company’s business, I refer you to the press release issued this afternoon and filed with the SEC on Form 8-K as well as the company’s reports filed periodically with the SEC.

The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless otherwise required by law. With that, it’s my pleasure to turn the call over to Mr. Adam Levy. Adam, please go ahead.

Adam Levy: Thank you, Valter, and thank you, everyone, for joining us today to discuss our first quarter 2024 financial and operating results. Following a record year of growth in 2023, I am pleased to report our first quarter financial results that demonstrate steady growth year-over-year and preparedness for significant growth levers we expect in 2024. First quarter revenue increased by 104% year-over-year to approximately $1.27 million, exceeding our first quarter revenue guidance of $1.25 million provided during our year-end conference at the beginning of April. As a reminder, revenue during this quarter does not include the nonrefundable deposit of $176,000 from AbbVie against their first purchase order. For the first quarter, our gross profit margin was approximately 22% as compared to negative gross margin for the same period the prior year and an increase sequentially as compared to 14.6% in Q4 of ’23.

Our strong top line results reflect an increase in both contract manufacturing and consumer branded product business segments with revenue increasing year-over-year by approximately 58% and 178% respectively. Sequentially, total revenue increased by approximately 17%, while the consumer branded product segment increased by approximately 57%, reflecting our first full quarter of revenue contribution from the acquisition of Kenkoderm. While we continue on our path of steady growth year-over-year both in branded sales and contract manufacturing, we are also investing in future growth of the business. Our investments made during the quarter were twofold. First, alongside capacity expansion in our converting and packing facility in Texas, we purchased and are installing state-of-the-art new equipment, and secondly, we are making the final investments in preparations for meeting European compliance requirements.

Q&A Session

In 2023, we acquired ownership in the CG Converting and Packaging business and its facility in Texas. The addition of this facility not only added an additional revenue stream for us, but also provided us with optionality to increase capacity in order to support the new client relationships that we expect given our robust pipeline of new customers. As we have mentioned, we are in the process of completing the expansion of our CG Converting and Packaging manufacturing facility to double its existing square footage, providing us with the needed capacity to support the increased demand that we expect to see this year. While the expansion is funded by our landlord in terms of the building construction, during the quarter we invested $152,000 in CapEx for state-of-the-art automated machinery and related clean room facilities.

Going forward, we have minimal additional CapEx for this project to complete the expansion currently targeted for this summer. A key driver for this investment is our partnership with AbbVie as the exclusive supplier of gel pads for their RESONIC Rapid Acoustic Pulse device for reduced cellulite appearance. We still expect to launch this device by the end of the year and continue to work closely with their team. As I mentioned above, we have invoiced them a $176,000 as a nonrefundable deposit that will be applied against future orders. This has yet to be included in our quarterly revenue. In branded consumer products, we currently have 31 health and beauty products sold direct-to-consumer and several growth strategies in place, which are driving a stronger retail presence in North America and eventually our expansion into Europe.

The key addition to our product portfolio is our newly acquired Kenkoderm product line. This is our first full quarter of revenue contribution from six new Kenkoderm products, which focus on treating the symptoms of psoriasis. The Kenkoderm line complements our current product offering and has been a contributor to our quarterly revenue growth. In Q4, we began the process of attaining MDR compliance, which will provide us with the ability to self-certify all of our Class 1 devices for sale into the European market. Costs associated with MDR compliance carried into Q1 as expected in the amount of $102,000. Achieving the certification is extremely important for our long-term growth given the opportunity we have to enter the European market through our partnership with STADA as well as other potential distributors.

We expect the final and lesser amount of fees relating to MDR compliance in Q2 in anticipation of distributing and commercializing our first products in Europe later this summer. In total, our expenses will be reduced and more normalized in the second half of 2024 as our facility expansion is completed and we receive MDR compliance. Cash at March 31, 2024 was $2.4 million as compared to $2.7 million at December 31, 2023. In February of 2024, we also completed a registered direct offering led by insiders for net proceeds of just under $1 million at attractive terms. I feel very comfortable with the runway of cash we have on hand to fund our operations going forward. With that, I would like to turn the call over to our CFO, Adam Drapczuk. Adam?

Adam Drapczuk: Thank you, Adam. Today, I’ll review financial highlights of our first quarter 2024 results. For the quarter ended March 31, 2024, revenue totaled $1.27 million an increase of $646,000 or 104% as compared to $620,000 for the quarter ended March 31, 2023. The increase in revenue was driven by sales growth in contract manufacturing of approximately 58% and consumer branded products of 178%. Gross profit totaled $277,000 for the three months ended March 31, 2024 compared to a gross loss of $57,000 for the three months ended March 31, 2023. The increase of $334,000 in gross profit year-over-year was primarily due to the increase in consumer branded products. Gross profit margin for the first quarter of 2024 was 21.9% compared to a negative gross margin for the first quarter of 2023 of 9.2% and a gross profit margin of 14.6% in the fourth quarter of 2023.

Cost of revenues increased by $312,000 or 46.1% to $989,000 for the three months ended March 31, 2024 as compared to $677,000 for the three months ended March 31, 2023. The increase in cost of revenues is primarily aligned with the increase in revenue growth. Selling, general and administrative expenses increased by $349,000 or 43.8% to $1.1 million for the three months ended March 31, 2024 as compared to $797,000 for the three months ended March 31, 2023. The increase in selling, general and administrative expenses is primarily attributable to an increase in advertising, marketing and Amazon fees, professional and consulting fees, end of compensation and benefits expense. Research and development expenses decreased by $27,000 to $2,000 for the three months ended March 31, 2024 from $29,000 for the three months ended March 31, 2023.

Net loss for the three months ended March 31, 2024 was $905,000 as compared to a net loss of $807,000 in the three months ended March 31, 2023. As of March 31, 2024, the company had a cash balance of $2.4 million which included an approximately $1 million registered direct offering led by insiders. As Adam explained earlier, there was a net usage of cash for investment in the first quarter of 2024, due to several nonrecurring key strategic investments and acquisition costs. I would now like to open the call for questions. Operator?

Operator: [Operator Instructions] We’ll go first this afternoon to Naz Rahman at Maxim Group.

Naz Rahman: I have a few. First, I want to start on the potential European launch. Could you talk a little bit more about your strategy in terms of commercialization in Europe? Like what product just initially entering the market? And which countries may you initially enter or sell at initially? Also, could you talk a little bit about how commercializing in Europe is similar or different than the United States?

Adam Levy: Sure. Hi, Naz. Good to hear from you again. So the first product, when you have MDR compliance as a medical device company will be Class 1 medical devices. So when we pass our inspection, which is currently scheduled for the end of May this month. We will then be able to self-certify and release those products immediately. We do have interest in Australia, the UK, and the Nordic countries for the Hexagels, which is a Class 1 and is our second largest selling product here in the U.S. We have a lot of interest also in SilverSeal. However, SilverSeal, because it’s a wound care device, is a Class 3. So, realistically, you can’t self-certify it, and, realistically, that will not be cleared until fourth quarter. At the earliest, fourth quarter, maybe first quarter.

So you’re looking at a second quarter release of next year, for SilverSeal. Kenkoderm is also regarded some interest, and we actually have some smaller Eastern European and Nordic countries that want to distribute that as well. So that’s probably the first thing that you’ll see as we as we get that moving.

Naz Rahman: Could you talk a little bit about the difference in commercializing or the difference in commercializing Europe versus United States? Like, what do you expect in terms of that?

Adam Levy: Well, there’s a there’s a lot of differences, and understanding a market is really important. That’s one of the reasons why we’re looking for distribution partners. Right? So I would never really attempt to go into a place like STADA and explain to them how they should market our products in Spain or in England or somewhere where they already are and they have a successful brand. The same reason they selected us, to help them understand the U.S. market. So having good partnerships, having good distribution partners, is really the key. And we kind of defer to what they want to do and what they do in their territories because they’re the experts there.

Naz Rahman: The next question I have is on your capacity expansion. Once you’re done with, all the construction work and validating all the equipment. Is there an FDA inspection that is required? Are you expecting, like, an FDA inspection, and what might the timing of that be?

Adam Levy: Yes. No. Probably not. That would be very unlikely. We’re 13485 medical device facility. ISO inspections for sure. The FDA usually only comes in very sporadically and would only come in if there were a problem, but the FDA doesn’t really inspect your equipment like that for a non-drug facility like we are.

Naz Rahman: And also just on a similar point, would you expect an inspection of some sort or plan inspection of some sort by AbbVie or any of your other partners regarding the expansion?

Adam Levy: Well, they’ll do their normal yearly inspections. They’ll do they have a requirement to come and inspect just like we inspect them. Right? So we just completed our inspection of the manufacturing facility at STADA for the product they’ll be shipping to us. So inspections are a regular part of the business. They go on all the time. So, yes, we’ll have them. The exact timing of which, I’m not sure of. The biggest inspections you can always count on, though, is ISO. I see the ISO inspections are regularly scheduled.

Naz Rahman: On Kenkoderm, you had one of your first full quarter of launch and the first full quarter where it was under NEXGEL stewardship. Could you sort of talk about how the, could you talk about Kendall’s progress under NEXGEL and sort of anything that shifted from where it was back in 2023 when it was a private label?

Adam Levy: So, the main thing about it is that there were only pleasant surprises to start with. We thought that we could help optimizing the advertising. That’s going very well. Of course, the optimization continues and goes along. As I mentioned on the earlier in the call, when you asked the other question, you know, we now have interest in a couple of smaller territories and distributing in Europe. These are all incremental additions to something that we already own. In addition, we still haven’t begun the cross promotion. So we’re working on an update and upgrade to our Medigel retail website. When that update is completed, we will then begin kind of announcing to the Kenkoderm customers, and they have about 35,000 emails and 9,000 Facebook followers that, you know, hey, good news.

We’ve got a sister company. Use code Kenko. Get 15% off. Check out these products. We’ll begin to cross promote between the two companies, and that hasn’t started yet. That will start when the website’s completed in June.

Naz Rahman: I have another last question. So I, if you recall correctly, you guys have been, going back to in person trade shows. Could you talk a little bit about the reception and feedback you’re getting, relative to NEXGEL’s technology and potentially new verticals or industries you might be entering with the technology?

Adam Levy: Yes. So I didn’t get the first part about the trade show. Naz, what was the question there?

Naz Rahman: What kind of feedback have you been getting from the trade shows?

Adam Levy: Well, so we get, we’ve been getting great feedback. There’s some really interesting companies that, very early stage that we are making test roles for that have all sorts of applications in medical device, how successful they’ll be. And they’re not huge customers now because they’re ordering $5,000 or $10,000 or $15,000 worth of gel to run their experiments and develop their projects. But there’s seem to be lots of really cool applications for our technology and we think a few of them could end up being very big, but most of them are still very early stage.

Operator: [Operator Instructions] And gentlemen, it appears we have no further questions this afternoon. So that will bring us to the conclusion of today’s call. Ladies and gentlemen, thank you for joining NEXGEL’s First Quarter 2024 Earnings Conference Call. Again, thanks for joining, and we wish you all a great evening. Goodbye.