NexGel, Inc

Good evening. I will be your conference operator today. At this time, I would like to welcome everyone to the NextGel Inc.' 's fourth quarter and full year 2021 earnings conference call. Please be advised that today's call is being recorded. I will now turn the call over to Valter Pinto, Managing Director of KCSA Strategic Communications. Please go ahead.

Thank you, operator. Good evening and welcome everyone to the NextGel fourth quarter and full year 2021 earnings conference call. I'm joined today by Adam Levy, Chief Executive Officer, and Adam Drabestock, Chief Financial Officer of NextGen. Before we begin, I'm going 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 Private Securities Litigation Reform Act of 1995. And actual results may differ materially due to a variety of risks and 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 today and filed with the SEC on Form 8K, 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 statement, whether as a result of new information, future events, or otherwise, unless otherwise required by law. In addition, during the course of today's call, We may refer to non-GAAP financial measures that are not prepared in accordance with accounting principles generally accepted in the United States and that may differ from non-GAAP financial measures used by other companies. Investors are encouraged to review NextGel's current report on Form 8K, first with the SEC, for NextGel's reasons for including those non-GAAP financial measures in its earnings release. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures are contained in our earnings release issued this evening, unless otherwise noted herein. With that, it's my pleasure to turn the call over to Mr. Adam Levy. Adam, please go ahead.

Thank you, Walter, and thank you, everyone, for joining NextGel's inaugural earnings call to discuss our financial and operating results for the fourth quarter and full year of 2021 period. NextGel is a leading provider of ultra-gentle, high-water content hydrogels with broad applications in the healthcare and consumer industries. 2021 was a pivotal year for our company and culminated with the closing of our initial public offering in December and trading on the NASDAQ under the symbol NXGL. The proceeds from the IPO will allow us to accelerate the growth across each of our three complementary business verticals, medical device, custom and white label manufacturing, and proprietary branded products. Our business model leverages our existing 13,500 square foot GMP ISO certified facility, our unique hydrogel manufacturing technology, and decades of experience in contract manufacturing for healthcare and consumer brands to pursue new high growth market opportunities in strategic and cost effective ways. Furthermore, Our core technology, the electron beam accelerator, eliminates the need for harmful chemicals in the cross-linking hydrogel manufacturing process, which makes our gel well-suited for a wide range of healthcare and consumer applications. Our gentle high-water content and paraben-free formulations make our patches often the only option for many medical device, dermatology, and beauty and cosmetic applications. These are very large potential market opportunities. We believe there are growth opportunities across each of our three new business verticals, as well as the potential for steady growth in our original contract manufacturing business. First, considering our history of developing and manufacturing components for medical devices for successful healthcare companies, we saw a clear opportunity to pursue creating our own medical devices. Our strategy for this vertical is to sign and develop FDA-approved 510K devices with relatively simple predicates for the hospital market. I stress that our strategy is not to build out our own sales force, but to license our proprietary technology to healthcare partners to commercialize. We will continue to remain focused on managing our expenses and staying lean. Second, we are developing our own branded products for consumer health and beauty applications, including skin care, wound care, and sports-related products, which we are currently selling on Amazon.com. This vertical allows us to capture revenue within our existing facility capabilities facility capacity at minimal cost as we have the ability to create small initial batches of these products, which can be done very inexpensively in our own plant. Lastly, our third vertical of opportunity represents the evolution of our contract manufacturing capabilities. In addition to the continued servicing of our existing contract manufacturing customers, we are partnering with companies to co-develop custom-labeled products as well as executing white-label projects in healthcare and consumer applications. Our electron beam manufacturing process allows us to offer potential clients a natural line extension to existing successful products by delivering their formulations in a suitable patch. Other patches on the market today are simply not suitable for many dermatology, healthcare, or beauty and cosmetics applications because of their chemicals and or adhesives. We believe there is considerable potential in developing products with these existing successful brands. which could translate into commercial orders for innovative healthcare and consumer products. Importantly, Nextgel bears no risk for either developmental or sales and marketing costs. This vertical presents us with stable cash flow in what is historically a very sticky business. We also intend to initiate proof of concept studies for potential opportunities to co-develop patentable drug delivery products. This is an exciting time for NextGel as we aim to deliver our uniform high water content and comforting hydrogels to a variety of healthcare and consumer product companies. As only one of two medical grade hydrogel manufacturing facilities with our unique ability, we are well positioned to attract industry leading partners for our medical devices and custom label projects. With that background, I would like to highlight our financial and operational progress for 2021. Revenue for the full year of 2021 was $1.55 million, an increase of 130% or $877,000 compared to the prior year period. For the fourth quarter of 2021, revenue was $533,000 or an increase of 428% or $432,000 compared to the fourth quarter of 2020. The year-over-year increase in revenue for both the quarterly and full year period was driven by sales generated from our new verticals custom and white label manufacturing, and our branded product sales. As of December 31st, 2021, we had $13.35 million in cash. In June of last year, we appointed Adam Drapsik as Chief Financial Officer, who is joining us on today's call. Adam brings nearly two decades of experience guiding healthcare companies to full-scale commercialization. Adam has been instrumental in developing our commercialization strategy for our medical devices, as well as establishing a best-in-class financial reporting infrastructure. In September of 2021, we appointed Miranda Teledana to our Board of Directors. Miranda is a seasoned biotech executive with a strong capital markets background. In our medical device vertical, NexStrape, our first proprietary application, is our skin-friendly solution for the surgical inside straight market. Specifically designed for patients with fragile or compromised skin, the NexStrape leaves the epidermis intact after removal from surgery, as compared to current surgical incised drapes, which can cause skin tears, removal of skin, and adverse skin reactions. Nextrape provides consistent adhesion without skin irritation, thereby decreasing the risk of infection and discomfort for patients. We have filed worldwide patents based on our two human cadaver proof of concept studies and are progressing discussions with the FDA for a 510 predicate device application. In addition, we are designing and developing other medical device opportunities within the hospital market also addressing skin integrity and overall skin condition. To remain lean and focused on profitability, we are pursuing partnerships through a licensing strategy to commercialize these medical devices. In our branded products vertical, we launched our Metagel brand, which includes OTC products for skin, burn, and wound care, as well as migraine and fever relief patches. With nine SKUs currently available on Amazon, to date we have seen strong demand for our Metagel products. which contributed significantly to the year-over-year revenue growth. Our flagship MetaGel SKUs are the SilverSeal OTC products, leveraging the silver-impregnated hydrogel-based technology of SilverSeal. In late 2021, we announced a study that demonstrated that NextGel SilverSeal wound care products are 99% effective in reducing common bacteria, fungus, and yeast. These claims differentiate our products in the market, where consumers want to limit the risk of infection. Furthermore, we are undergoing clinical studies to show the impact of silver seal on scarring. The scar market is large and growing, and the ability to claim scar reduction would be a significant long-term opportunity for NextGel. We expect to publish the results in the coming months. Going forward, we expect to launch our beauty and cosmetics brand, LumaGel, in the second half of 2022. In our custom and white-label manufacturing vertical, numerous companies have engaged us for development projects, to explore creating new healthcare and consumer products. It is important to note that these development projects are funded by the customer with no cost to Nextgel aside from the time needed to use our facilities and have the potential to lead to commercial orders in later months or quarters. In 2021, we received seven commercial orders stemming from just nine previous research projects. We are confident in our multi-pronged market approach, which provides us with multiple shots on goal while we leverage our existing capacity. Currently, we have the ability to significantly scale our facility utilization without the need for additional overhead or major changes to our employee base. This is possible through one, our high volume manufacturing facility, which can produce up to 1.4 billion square inches of product per year, two, our own converting and packaging capability, and three, our third party vendor relationships that can support the cutting and packaging for large volume orders beyond our in-house scope. Looking ahead for the remainder of 2022, we expect revenue to increase year over year and margins to improve due to our ability to limit fixed cost growth while our revenue ramps for the foreseeable future. We expect continued sales growth from our existing branded products listed on Amazon and expect to recognize initial sales from several new SKUs as well as our Lumigel launch planned for the second half of 2022. In the custom and white label manufacturing vertical, interest has been strong, and we have a robust pipeline of potential new customers. Keep in mind, however, that the timing of these development projects can significantly vary and do not always lead to commercial orders. In summary, we have seen great progress in each of our new business verticals. With the completion of our IPO, we now have the funding and extended runway to develop and grow them further. With that, I'll hand it over to our CFO, Adam Drapsik, to walk through our financial results in more detail. Adam, over to you.

Thank you. Revenue for the full year of 2021 was $1.55 million, an increase of 130% or $877,000 compared to the prior year period. For the fourth quarter of 2021, revenue was $533,000, an increase of 428%. or $432,000 compared to the fourth quarter of 2020. The year-over-year increase in revenue for the quarterly and full-year period was driven by sales generated from new verticals, such as custom and white-label manufacturing projects and our branded product sales. Gross profit was $9,000 for the year ended December 31st, 2021. compared to a gross loss of $291,000 for the year ended December 31, 2020. Gross profit reported for the quarter ended December 31, 2021 was $104,000, an increase of $242,000 compared to the year-ago quarter. This was primarily due to the higher volume of contract manufacturing sales against our fixed costs. Gross profit margin was approximately 0.6% for the year ended December 31, 2021, compared to a gross loss of 43.2% for the year ended December 31, 2020. Cost of revenues increased by $577,000 to $1.5 million for the year ended December 31, 2021, as compared to $965,000 for the year ended December 31, 2020. Cost of revenues reported for the quarter ended December 31st, 2021 was $429,000, an increase of $190,000 compared to the year-ago quarter. The increase in cost of revenues is primarily attributable to the new product line growth. Operating expenses, including research and development and selling general and administrative expenses, increased by $610,000. to $2.58 million for the year ended December 31, 2021, as compared to $1.96 million for the year ended December 31, 2020. Operating expenses for the three months ended December 31, 2021 was $991,000, an increase of $453,000 compared to the three months ended December 31, 2020. The increase in operating expenses is primarily attributable to our costs for professional fees, driven by one-time costs associated with the NASDAQ listing, executive compensation, share-based compensation, and other administrative expenses. Compensation and benefits decreased by $81,000 to $381,000 for the year ended December 31, 2021. as compared to $462,000 for the year ended December 31, 2020. The number of employees increased compared to the prior period. However, a restructuring of certain staff resulted in cost efficiency. Share-based compensation increased by $53,000 to $285,000 for the year ended December 31, 2021, as compared to $232,000 for the year ended December 31, 2020. The increase in share-based compensation was attributed to the issuance of stock options and the issuance of restricted awards to our officers, employees, and advisors. Other expenses and professional fees increased by $638,000 to $1.90 million for the year ended December 31, 2021, from $1.26 million for the year ended December 31, 2020. Other selling general administrative expenses generally consists of costs associated with our selling efforts and general management, including information technology, travel, training, and recruitment. We continued to incur legal, accounting, and consulting fees associated with public company governance requirements. However, the increase in professional fees compared to the prior year period was primarily related to the NASDAQ uplisting on December 27, 2021. As of December 31, 2021, we had $13.35 million in cash. Net cash used in operating activities was $2.9 million and $1.8 million for the years ended December 31, 2021 and 2020, respectively. As of December 31st, 2021, the company had 5,572,234 common shares issued and outstanding. With that, I will turn it back over to Adam Levy for closing remarks.

Thank you, Adam, and thank you all for joining us this evening. I'm extremely proud of what our team has accomplished in the rather short period of time, especially considering all the challenges the world has faced in recent years. To reiterate, We believe we have many revenue opportunities ahead of us, and we look forward to scaling our manufacturing facility with a focus on profitable growth. To date, I am encouraged by the market reception from our current and prospective partners and excited for the years ahead. I would now like to open the call for questions. Operator?

Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start key. One moment, please, while we poll for questions. Our first question comes from the line of Nas Rahman with Maxim Group. Please proceed with your question.

Hey, guys. Thanks for taking my question, and congrats on the year and the IPO. I'm going to talk a little about your 510K filings. Could you talk a little more in detail about the current status of the filing for both Next DRAP and Next DERM? What do you think you could file them by, and what are the current gating factors until filing?

Hi, Nas. Thanks for joining. So, yes, we have started the process. We've engaged the agency. We've begun the preliminary tests. We've selected our predicate device on the Next DRAP. So our meeting with the agency comes next month. We've looked at the predicate device, and basically there's very, very little in terms of clinical studies that they did. It's mostly bench testing and meeting certain metrics, particularly around bacteriological results and adhesion. But we think that we are well positioned to kind of move down the pathway. Now, of course, the agency can always throw you a curveball, but we're hoping to file sometime in the third quarter on the drape. Now, as far as the Nextderm goes, which is sort of the Tegaderm competitive product, we are still going down to actually do some studies to finalize design. And we've kind of taken a backseat to see what the agency says about Nextrape, and then we're going to learn from that and then amend our application and get ready to file that probably in the following quarter or possibly the beginning of next year.

Is there any additional manufacturing work that you have to do prior to these filings?

No real manufacturing work. We kind of have our formulation, and we finalize that, and it performs very well. Really what we're looking at on the next term is more how we want the physical attributes of the product to be so that it's easy for the practitioners to use. It doesn't change their current standard of care or the way they manage the product. It doesn't create any additional work for them. and provides all of the things that they like about Tegaderm while still being very gentle to the skin and not harming the elderly patients.

Got it. I also had another question on the Amazon business lines. Could you possibly talk about how many additional products you may potentially launch in 2022? And also, what does the cadence of those launches look like? How many products could you potentially launch in a quarter?

So we're looking at probably six more products this year in addition to what we currently have. A lot of this is governed by supply chain. We manage our supply chain very, very well, even given the current environment. But whenever you start a new product and you're going out to order foil for the first time and it becomes a new SKU, there is a little bit of a delay because you don't have that existing inventory behind. So that's probably our biggest single limiting factor, but we are looking at six to eight and we'll probably be at a position to release two to three products a quarter moving forward.

On the supply chain point, do you have adequate supply for like the remainder of the year for your existing products?

We do. It's interesting because the supply chain issues have actually affected the contract business a little bit more so than than our own branded products and or custom because we control those supply chains. On the contract manufacturing, we've had issues where customers had to push off their orders because they couldn't get materials that they needed to finish their product. So we have seen a little bit of impact from it, but nothing too terrible or too significant. Okay.

And just a final question. All right. So your gross margins look like they finally turned positive in the fourth quarter. What do you think the gross margin progression could be for the remainder of the year? If you could provide some high-level color on that, that would be helpful.

So it's really almost a straight line for the foreseeable future in terms of we have very, very fixed overhead for a considerable ramp in sales. There will come a time, obviously, when you start having to add more employees, add additional ships, but we're still probably at least a year away from that. So the next ramp of growth, probably almost doubling or two and a half times the size of the business, will not require any significant overhead increases for us. And you'll see that reflected directly in the margins because the fixed costs were so high when we started.

Got it. Thank you. Thanks for taking my questions. And once again, congrats on the quarter on the IPO. Thank you.

And this concludes the question and answer session. And this also concludes today's conference call. You may disconnect your lines at this time. Thank you for participating and have a pleasant day.