NexGel, Inc

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the Next Gel, Inc.' 's second quarter 2022 earnings conference call. Please be advised that today's call is being recorded. I'd now like to turn the call over to Walter Pinto, managing director of KCSA Strategic Communications.

Please go ahead.

Thank you, operator. Good evening and welcome everyone to the NextGel second quarter 2022 earnings conference call. I'm joined today by Adam Levy, Chief Executive Officer, and Adam Drasek, Chief Financial Officer of NextGel. 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 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 revive 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.

Thank you, Walter, and thank you, everyone, for joining us to discuss our financial and operating results for the second quarter ended June 30th, 2022. NextGel is a leading provider of ultra-gentle, high-water content hydrogels with broad applications in the healthcare and consumer industries. We operate one of only two electron beam hydrogel manufacturing facilities a 13,500-square-foot GMP ISO-certified FDA-registered facility. Our gentle high-water content and paraben-free formulations make our patches the only option for many medical device, dermatology, and beauty and cosmetic applications, which are all very large addressable markets. During our last quarterly earnings call, I noted the impact of macroeconomic challenges throughout the supply chain. While many of these challenges remain today, I am pleased to report that NextGel generated revenue of $561,000 for the second quarter of 2022, which is an increase of $144,000 or 35% year-over-year compared to $417,000, and an increase of 42% as compared to $396,000 last quarter. Revenue growth is primarily attributable to our branded products and contract manufacturing segments. Since the launch of our branded products in late 2020, we have seen rapid growth through our e-commerce distribution strategy on Amazon, which represents 90% of our branded products consumer revenue. Amazon allows for Nextgel to evaluate products on reduced budgets as we test the market for product adoption. This allows us to carefully manage our costs while gathering consumer feedback for product refinement and to prepare our messaging strategy for market expansion beyond Amazon. We are pleased to see that our branded products including our recently launched MetaGel HydroLiner ProPads, are resonating well with our customers and continue to grow. We continue to see demand increase for HydroGel in our contract manufacturing line as a result of our consumer outreach initiatives and an increased demand overall for skin-friendly product profiles. An important highlight to note was our ability to generate positive gross profit for the second quarter of 2022 as compared to gross loss during the prior quarter in Q1. The change in gross profit was primarily due to our increased revenues against fixed costs. This, along with reductions in our SG&A, has resulted in the decrease of our quarterly operating loss of 95,000 and a lower cash burn, despite an increase of R&D investment by 87,000 as compared to Q1. Our operating strategy is to scale our business methodically continue to increase our revenue, maintain and control our fixed costs, and reduce our cash burn while simultaneously investing in R&D to identify long-term growth opportunities. In short, we want to move towards profitability without sacrificing our aspirational programs. Under medical devices, we continue to make progress with the FDA for NexStrape, our skin-friendly antibacterial solution for the surgical incised rape 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. Since our last report, the company has identified its required testing protocols and schedules, and we are pleased with our progress towards meeting the requirements for our 510 case submission. The increase in our R&D budget as compared to Q1 is also due to the initiation of drug delivery proof of concept studies on our first two 505B2 candidates. We believe that there may be significant opportunity using our technology for drug delivery. In our branded product vertical, our Metagel brand recently launched the Metagel HydroLiner ProPads for protecting eyelashes during cosmetic extension and lift and tint services. As we continue to add SKUs to our product offerings available on Amazon and on our own website, www.metagel.com, Second quarter branded product sales grew to 180,000, which is an increase from 111,000 year over year. In our custom and white label manufacturing vertical, interest remains strong, and we have started several new custom R&D projects. This business segment 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. Furthermore, Nextgel bears no development costs because those costs are funded entirely by our clients. I am proud of our team for the progress we have made thus far in 2022, and even more excited for what is ahead of us in the second half of 2022 and beyond. We will remain focused on executing a thoughtful, multi-pronged marketing approach. We expect revenue to continue to increase year over year, allowing us to continue to both reduce our net cash burn and invest in the business to create long-term shareholder value. 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 June 30th, 2022, revenues were $561,000, an increase of 35% when compared to $417,000 for the three months ended June 30th, 2021. Revenue increased 42% when compared to the first quarter of 2022. Our gross profit was $101,000, yielding an 18% profit margin for the three months ended June 30, 2022, compared to a gross profit of $4,000 for the three months ended June 30, 2021. Cost of revenues was $460,000 for the three months ended June 30, 2022, as compared to $413,000 for the three months ended June 30, 2021. The increase in cost of revenues is primarily aligned with the increase in revenues in the current year. Other operating expenses, including R&D and SG&A expenses, increased by $262,000 to $819,000 for the three months ended June 30, 2022. as compared to $557,000 for the three months ended June 30, 2021. During the quarter, R&D totaled $111,000, as compared to $10,000 during the second quarter of 2021 and $24,000 during the first quarter of 2022. Compensation and benefits increased by $52,000, or 63%, to 135,000 for the three months ended June 30, 2022, as compared to 83,000 for the three months ended June 30, 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 125,000, or 34%, to $490,000 for the three months ended June 30, 2022, from $365,000 for the three months ended June 30, 2021. Other SG&A expenses generally consist of costs associated with our selling efforts and general management, including information technology, travel, training, and recruiting. Net loss for the three months ended June 30, 2022 was $1.0 million, or $0.19 per basic and diluted common share, as compared to a net loss of $826,000, or $0.28 per basic and diluted common share for the three months ended June 30, 2021. As of June 30, 2022, we had $9.7 million of cash and cash equivalents, including our investment in treasuries of $5.4 million. In order to take advantage of the current interest rate environment, the company invested in U.S. Treasuries using a ladder strategy, with maturity dates ranging from three months to a maximum of one year. The company has invested a total of $7 million, $5.4 million of which has been accounted for as marketable securities, and $1.6 million as cash and cash equivalents because the Treasuries mature within three months of June 30, 2022. As of June 30, 2022, and the date of this call, the company had 5,572,234 common shares issued and outstanding. I would now like to open the call for questions. Operator?

Thank you very much, sir. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. Just another reminder, if you'd like to ask a question, please press star and then one.

One moment, please, while we poll for questions. The first question comes from Naz Rahman from Maxim Group.

Please proceed with your question.

Hello. Thanks for taking my question, and congrats on the quarter. I have several questions. I just want to start on NextRate. What additional clinical work do you have to do for Nextrape, and what kind of data can we expect by year end?

Good question. Nice to talk to you again, Naz. So the Nextrape clinical work is basically in line with the testing that the agency has told us will be required for the submission. So what we've scheduled are mostly physical tests as well as an antibacterial test regarding the CHG in our drape. the agency has their normal range for a predicate device of tests, and scheduling and getting those all done is paramount. The additional clinical work that we have to do in terms of product refinement and design center mostly around packaging and sterilization protocols. Does that answer the question for you?

Yeah, it does. Just a couple of follow-ups on that. Is this testing going to be conducted... in humans or can you do non-human studies seeing how most of these patients would be anesthetized prior to surgery?

So the studies you're thinking of, when you talk about in-human studies, there aren't any studies required by the agency, for example, during someone's surgery, so not what I really call a clinical study. We do do some of the skin tests for skin sensitivity, et cetera, on humans, but those are human volunteers that put a patch on their arm or put the material on their arm at a place like Eurofins or Nelson Labs. The agency has not required any studies that have to be done in hospital during procedure. Now, we may do some of those in a side-by-side. We are discussing setting this up now so that we can have sort of phase four type data to make claims, but the agency is not required. This would just be like a side-by-side to show skin removal comparisons, skin care comparisons, things of that nature with the current standard of care.

Got it. So based on... So based on this, A, when can we expect to see the data? And B, when could you potentially file?

So we think we're still on track to file in the fourth quarter. The thing that's difficult to speak about is sort of just how the backlog of testing is in the different agencies. But right now, I think we're still on schedule for our fourth quarter submission. If we're delayed, we're talking weeks, not quarters.

Got it. Thanks. I also want to discuss your Amazon business. How many additional launches do you think you can make for the remainder of the year?

So it's a great question because the one challenge we've had with the supply chain has not been so much resupplying our own products that are already out because we manage that very, very well and keep inventories well in advance because we know how long some of the lead times are. But when you go to release a new product and it's your first order, say, of pre-printed foil, Those lead times are running very, very long. In fact, we were hoping to have a couple of new products, which would be our turf guard, the 2x3 of silver steel. Originally, we had scheduled those for July, and they now look to be pushed out until October, November, just because the initial order of the materials is taking so long. Once those materials are in hand, then we'll never run out again because we're going to manage the supply chain, you know, hopefully. I never like to jinx ourselves like that. But we do plan on releasing at least four more SKUs between now and the end of the year. And we're going to be as aggressive as we can because we do have a lot of product ideas and a lot of product in the pipeline.

Got it. And those lead times. So obviously across almost every industry, people are seeing supply chain issues. But have you seen those lead times sort of come down within recent months or have they sort of increased from, let's say, late 2021, early 2022?

Well, I haven't really seen an increase, but we have seen some items come down. You know, our polymer, some things are much easier to get, our Dell mat. Certain items have come down in lead time, but certain items like pre-printed aluminum foil, which is necessary to create the vapor lock for our product packaging, that timeline has not yet come down, at least not that we've seen.

Got it. Thank you. And I guess my final question is, just on your gross margins. So now you're generating positive gross margins. What do you think the trajectory for your gross margins could be for the remainder of 2022?

Well, it's a linear result compared to our sales. Because remember, as we've discussed on previous calls, our gross margin, a very, very large percentage of our COGS is fixed costs. So the actual maintenance of the accelerator, the people associated with it, we were at a very, very low utilization rate. That utilization rate is starting to creep up a little bit. But you'll see really nice things happen to the gross margin, not only because we're also – optimizing and lowering our COGS in general, but mostly because we're just having increased sales against fixed costs, and that always looks good on your gross margin.

Got it. Thanks a lot. Thanks for taking my questions, and once again, congrats on the quarter.

Thank you.

Thank you. Ladies and gentlemen, just another reminder, if you'd like to ask a question, please press star, then 1. If you'd like to ask a question, please press star, then 1. We will pause to see if there are any further questions before we conclude. At this time, we have no further questions. This concludes the question and answer session. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines and thank you very much for participating and have yourselves a pleasant day.