NexGel, Inc

Good day, and welcome to the next show, Q1 2022 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Walter Pinter. Please go ahead.

Thank you, Operator. Good evening, and welcome, everyone, to the NextGel First Quarter 2022 Earnings Conference Call. I'm joined today by Adam Levy, Chief Executive Officer, and Adam Dropsik, Chief Financial Officer. 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 meanings 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 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 this evening 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 statements, 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 be different from non-GAAP financial measures used by other companies. Investors are encouraged to review NextGel's current report on Form 8K, furnished with the SEC for NextGel's reasons for including these 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 press release issued this evening and was otherwise noted here within. 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 us to discuss our financial and operating results for the first quarter of 2022. As a reminder, NextGel is the leading provider of ultra-gentle, high-water content hydrogels with broad applications in the healthcare and consumer industries. We have created both new products and lifecycle extensions for existing products that change and enhance the patient experience for the better. We operate one of only two electron beam hydrogel manufacturing facilities, a 13,500-square-foot GMP ISO-certified facility. Our core technology, the electron beam accelerator, eliminates the need for harmful chemical initiators and cross-linking for hydrogel manufacturing. This unique process makes our products 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, all very large addressable markets. Despite the macroeconomic challenges across the supply chain, I am pleased with our growth in the first quarter. For the three months ended March 31, 2022, revenues were $396,000, an increase of $129,000, or 48%. The increase in our overall revenues was due to sales growth of new products in custom label manufacturing and branded consumer products. As you may recall, our business can be a bit lumpy and has some seasonality with the fourth quarter typically being a high quarter in the year. We are now six weeks into the second quarter and feel very comfortable that our year-over-year revenue growth trend will continue for the foreseeable future. This growth is a testament to our continued execution in each of our verticals, medical devices, branded products, and custom contract manufacturing. Under medical devices, we continue to make progress with the FDA for NexStrape, our skin-friendly antibacterial solution for the surgical inside straight market. Skin integrity is very important for infection prevention, which is why we are developing this product specifically for patients with fragile or extremely sensitive skin. The company has filed worldwide patents on the product and recently had our pre-submission meeting with the agency. we now have a clear picture of our path forward. The other medical device opportunity we are tackling are IV and central line sites through our Nextderm product. Tegaderm, the current and most used product, can be very difficult and painful to remove on patients, especially for those with compromised skin. Nextderm's approach is to support compromised skin patients with a gentle product that is repositionable with pain-free removal and also has antimicrobial properties. As mentioned in our inaugural call, we are pursuing partnerships through a licensing strategy for these products to be commercialized in order to remain lean and focused on profitability. In our branded products vertical, our Metagel brand has 10 SKUs currently available on Amazon, with several more planned for later in 2022. Metagel demand continues to increase through our Amazon shop, as we have seen our sales grow across the entire product line. First quarter sales grew to 213,000 from 36,000 year over year. In our custom and white label manufacturing vertical, we started new custom label R&D projects with several new customers, and interest in the service remains very strong. As a reminder, our custom and white label manufacturing is complementary to our business model because it allows us to create relationships with various companies for development projects and to explore and jointly create new healthcare and consumer products. The development costs associated to these projects are funded by the customer, so NextGel bears no development cost risk. As we execute on our multi-pronged approach, we still have significant room for scaling our capabilities and facility utilization, which will lead to increased year-over-year revenues and improved margins. 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. As Adam mentioned, for the three months ended March 31, 2022, revenues were $396,000, an increase of $129,000, or 48% when compared to $267,000 for the three months ended March 31, 2021. Our gross loss was $22,000 for the three months ended March 31, 2022, compared to a gross loss of $42,000 for the three months ended March 31, 2021. Cost of revenues increased by $109,000, or 35%, to $418,000 for the three months ended March 31, 2022, as compared to $309,000 for the three months ended March 31, 2021. The increase in cost of revenues is primarily aligned with the new product line growth in the current year. Operating expenses, including research and development, and selling general and administrative expenses increased by $312,000 to $790,000 for the three months ended March 31, 2022, as compared to $478,000 for the three months ended March 31, 2021. The increase in operating expenses is primarily attributable to increased R&D spend and SG&A costs associated with the NASDAQ uplisting. Compensation and benefits increased by 63,000, or 71%, to 152,000 for the three months ended March 31, 2022, as compared to 89,000 for the three months ended March 31, 2021. The number of employees increased compared to the prior period, and officer compensation increased in conjunction with contract renewals. Other expenses and professional fees increased by 339,000, or 125%, to $611,000 for the three months ended March 31, 2022, from $272,000 for the three months ended March 31, 2021. 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. We continue to incur legal, accounting, and consulting fees associated with public company governance requirements. The increase in professional fees compared to the prior period was primarily in conjunction with the NASDAQ up listing on December 27, 2021. However, for the remainder of the year, the company anticipates managing general and administrative costs at current or potentially decreased costs compared to this current quarter. Net loss for the three months ended March 31, 2022 was 1.8 million or 33 cents per basic and diluted common share as compared to a net loss of 704,000 or 25 cents per basic and diluted common share. As of March 31, 2022, we had 10.52 million of cash lower than 13.35 million from December 31, 2021 as a result of payment of notes payable in the amount of approximately $2 million. As of March 31, 2022, the company had 5,572,234 common shares issued and outstanding. I would now like to open up the call for questions. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Naz Rahman with Maxim Group. Please go ahead.

Hi. Thanks for taking my question, and congrats on the year-over-year growth. On the 510K products, I guess starting with NextRate, could you provide some color on the feedback you received from the FDA and the path forward?

Sure. Hi, Naz. How are you? Well, the good news was when we were going in front of the agency is not to have any surprises. So we sort of had a very good idea based on our predicate as to what sort of testing we would have to do what sort of data we have to provide to the agency for all intents and purposes they pretty much confirmed that our plan was on target obviously asked us to do a couple of extra things and a couple things that we thought they'd ask us to do they didn't but overall there was no major surprise and we're still probably on target to file our application sometime this year okay um two questions here so just to confirm the essay didn't require

or isn't requiring any clinical trials, right? And two, one, do you think you can make the filing?

So we think we can make the filing this year. The biggest unknown in the filing, and again, I'm hopeful that there's no bad COVID surprise, is just the availability of the testing labs. Most of these tests are tests that we've done before on these gels, things like skin sensitivity and preservative challenge and stuff that we've had very similar products, you know, go through. We make these gels all the time. The agency did do what they sort of call a trial in terms of comfortability and skin irritation where we have to use real people, but not patients in a hospital. So these are tests that are regularly done in testing labs. We're using several and there's really no, there's no surprises to the downside for us in terms of expense and or time.

Got it. So hypothetically, once you start the testing process and you have access to the labs, how long do you think the tests themselves take? Is this something that can be done within like a few weeks or does it take months?

Well, some of the tests like stability, et cetera, do take a couple of months. Generally, these are tests that can be done in four to 12 weeks, 12 weeks kind of being the outside time. And then there's usually a few weeks of scheduling because the testing labs are pretty busy all the time lately. But we will get in the schedule. We've begun requesting the tests and getting ourselves in the schedule. So, By next quarter, we should have a lot of the testing completed, and I'll have an even better update for you.

Got it. Did the FDA make any comments or request any information regarding manufacturing? Like, did they request or do you expect a plant inspection anytime soon, or would that be, like, post-filing?

That would probably be post-filing. I mean, we are an FDA-registered facility. You know, we are a medical device 13485 facility. So to the extent that this is a medical device, I'm sure the FDA will come in and do their requisite inspections. But they did not mention that, nor did it come up on the call.

Got it. Do you have to have another meeting with the FDA? Or at this point, after you've completed all your testing and work, can you just submit your filings?

So they have not required another meeting. We have just submitted the notes. As you know, you have to submit the minutes of the meeting back to them within 14 days of having the meeting. We have just submitted it back to them. I do not think that we will necessarily have to have a meeting, but the agency has been very good, and we've been engaging with them. I mean, as the testing comes back, we may check with them on certain protocols, make sure everything is going along. We don't want to have any negative surprises. So we will continue to communicate with the agency, but they have not requested another formal meeting.

Got it. Now, on the Amazon Metagel business, could you provide some commentary potentially on the timing of future releases? I know you guys incrementally, sporadically release products through the course of the year, but some additional color would be helpful.

So we are still on target to try to have six more releases this year. Lumigel Beauty product will probably be released in August. maybe September, and that'll be the first face mask on the LumaGel Beauty line, followed by under eyes and then different types of face masks. We think there's a great deal of potential in the expansion of the SilverSeal line. So SilverSeal is sold right now on Amazon only in a 4x4. We know gel products like this very well. We manufacture them for some other folks. And we know that the 2x3 is the size of choice. We have never had a 2x3. The 2x3 will be coming online. sometime in mid-June, I would say. Again, supply chain willing, but that's our target date. So as we start to release that, we're going to release the TurfGuard product for turf burn. Those products are really going to, I think, carry the day and really boost MetaGel over the course of the summer.

At this point, do you have sufficient raw materials and inventory to do these launches? or are you still trying to source raw materials for these upcoming launches?

No, we have all the raw materials for those launches. The production cycle right now because of what's going on with aluminum is 12 weeks. We are halfway into that 12-week cycle. The product's on order. There have been no delays so far, and we have all the materials sitting in the factory. So, you know, we think we're fine with these. Now, that does impact future products that haven't yet been ordered. So we've just gotten our foil on order for the Lumigel Beauty products. So that's why we're looking at August for the release of that, because there is a longer lead time, particularly in printing. The printers are a little bit undermanned, a little understaffed, and the lead times have grown there. But we have no problem getting stuff. It's just a question of time.

Got it. And on the custom and white label business lines, You commented a little on the custom. Are you seeing an increase in order rates or potential requests for those business lines? Or have they sort of been relatively steady state? And I guess more broadly, has like the more recent like broader biotech market and contraction arguably the biotech markets impacted order flow for any particular reason?

So I'm going to try to answer this as best I can, and you'll guide me if I understood the question correctly.

Sure.

So the custom label, the idea is we develop a product with a partner. That product then buys the product from us and creates sales orders. And the development fee that they pay covers the cost of developing that product and then the technology they have to come to us for. We have released probably now three or four of those products. How the reorder pattern goes will depend on the commercial success of those products, which is, up to the sales and marketing and the quality of the product that we actually created and how it resonates with the consumer. I can tell you that we have had a large uptick in interest in creating custom products. As we're out there more, as people are beginning to understand that, wow, all these hydrogels feel great, but I could only really use this one if I'm in beauty and cosmetics because of the chemical load and the skin irritants and the others. we're beginning to make more and more inroads. We'll be attending, you know, more conferences, telling our story, you know, letting people understand what's unique about our hydrogels. And right now, we probably have as many research projects as we can handle.

Got it. Thanks for taking my question, and congrats on the quarter. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Adam Levy for any closing remarks.

Thank you, everybody. Thank you for joining and your interest and support in NextGel. We're very excited about this quarter and even more excited about the future quarters to come, and I look forward to speaking with you all again in the near future. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.