NexGel, Inc

Welcome to the NextGel 2022 Third Quarter Financial Results Conference. Today's conference is being recorded. At this time, I'd like to turn the call over to Walter Pinto, Managing Director at KCSA Strategic Communications. Please go ahead.

Thank you, Operator. Good evening and welcome, everyone, to the NextGel Third Quarter 2022 Financial Results Conference call. I'm joined today by Adam Levy, Chief Executive Officer and Adam Drabczyk, 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 meaning of the safe harbor of the Private Security 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 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 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 third quarter ended September 30, 2022. During the third quarter, we continued to make progress across the key areas of our business. First, from a financial and operational point of view, as I have mentioned historically, we are focused on driving year-over-year quarterly revenue growth. Third quarter revenue totaled $568,000, an increase of approximately 70% as compared to $335,000 for the third quarter last year. Year-to-date revenue has totaled a little over $1.5 million, 50% growth as compared to $1 million for the same period last year. This steady growth year-over-year has been driven by an increase in contract manufacturing and branded consumer product sales. interest in our custom and white label manufacturing remains strong 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 health care and consumer products as we continue to grow our revenue year over year our gross profits continue to improve as a high percentage of our cogs are fixed costs associated with operating our 16 500 square foot facility that Combined with our ability to scale with larger production runs of our commercially proven products has allowed us to yield a 26% gross profit margin in the third quarter as compared to a loss in the third quarter of last year and improved gross profit margin sequentially from 18% in the most recent second quarter. I expect us to continue to grow revenue in 2023 and in doing so, margins should naturally continue to improve as well. Next, We are investing strategically to drive our future growth. While we expect continued growth in both contract manufacturing and brand and consumer products, R&D is also a critical aspect of our growth strategy. Last year, we had no spending on R&D. This third quarter, we invested $193,000 in R&D and have done so methodically the last few quarters towards progressing drug delivery proof of concept studies. We believe there is a significant opportunity utilizing our technology for drug delivery as well as other medical device applications. We have developed a new proprietary hydrogel eye patch to treat amblyopia, a type of poor vision that typically occurs in one or both eyes, often referred to as lazy eye, and the most common cause of visual impairment in children. This condition affects two and a half to three and a half percent of children, And we estimate in the U.S. alone there are between 250,000 and 400,000 patients. The current standard of care is an eye patch. There are basically three types of eye patches. The traditional pirate patch, a patch that is attached to glasses, or a patch placed directly over the eye. The issue with the first two is that children can cheat by either lifting a pirate patch or looking out the side of a glasses patch. The highest level of compliance is generally with a patch directly affixed to the skin, completely covering the eye. However, the use of potentially painful and irritating adhesives can cause children a great deal of distress. We have recently filed worldwide patents on our unique solution, tentatively called the Hydra Patch, which is placed directly on the eye without the associated pain and irritation of traditional patches. Our plan is to distribute this product directly to ophthalmologists to be sold in office. The HydraPatch was developed in conjunction with Dr. Leonard Nelson of the Wills Eye Hospital in Philadelphia and was presented at the Dr. Joseph H. Calhoun, MD, Pediatric Ophthalmology Forum this past Friday. The reception and feedback were both very positive. We expect this product to be available in the first half of 2023. Amblyopia represents a very large opportunity for us, and we believe our product can make a real difference for the children affected. Furthermore, we are proud of our SilverSeal study, which was published in the Sage Journal's Scars, Burns, and Healing publication. SilverSeal was used post-surgery as an antimicrobial dressing to evaluate its ability to aid in the healing process in 40 foot and ankle patients in a double-blind randomized study. Post-operatively, the treatment group was given a SilverSeal hydrogel dressing, and the control group was treated with a standard petroleum-based dressing. The results indicated that SilverSeal demonstrated statistically significant improvement of skin functionality, fewer negative symptoms, and a reduction of scar appearance relative to the standard petroleum-based dressing. The scar treatment market is very large, and the SilverSeal data represents an opportunity to grow this product significantly. In Q3, we also completed a proof-of-concept study with positive results for the delivery of diclofenac using our hydrogel patches. The results of this study highlight the efficiency of our hydrogel patch as a delivery mechanism that is also gentle to the skin. With only two months of the calendar year remaining, I am encouraged by our team's accomplishments and execution efforts amidst the challenging macroeconomic backdrop. We will remain focused on executing a thoughtful, multi-pronged business strategy. The company is well financed and has ample runway through 2024 to accomplish our objectives. 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, revenue for the first three months ended September 30th, 2022 was $568,000, an increase of 69.6% when compared to $335,000 for the three months ended September 30th, 2021. The increase in overall revenue was due to sales growth in branded consumer products. Gross profit was $148,000 for the three months ended September 30, 2022, representing a 26% gross profit margin, compared to a gross loss of $57,000 for the same period in 2021. The improvement was primarily due to higher volume of contract manufacturing sales relative to fixed costs. The company anticipates continued improvement in gross margins due to both increased revenue against fixed facility expenses and larger production runs on commercially proven products. Cost of revenues was $420,000 for the three months ended September 30, 2022, compared to $392,000 for the three months ended September 30, 2021. The year-over-year increase reflects the higher sales generated in the current year. Total operating expenses, including R&D and SG&A expenses, increased to $1.2 million for the three months ended September 30, 2022, compared to $553,000 for the same period in 2021. The increase in operating expenses was attributable to an increase in R&D expenses and exceptionally high franchise tax charge of $220,000 due to the company's IPO and related increase in gross assets. We expect that these costs will normalize in the fourth quarter and beyond. In August 2022, the company reduced its authorized shares at its annual meeting. We expect this change will reduce the company's 2023 franchise tax liability to approximately $28,000, assuming a similar asset base. Compensation and benefits increased by $31,000, worth 35.6%, to 118,000 for the three months ended September 30th, 2022, mainly due to the larger number of employees compared to the prior year and as officer compensation increased related to contract renewals. Share-based compensation increased by $40,000 or 88.9% to 85,000 for the three months ended September 30th, 2022. Other expenses and professional fees increased by 367,000 or 87.8%, to $785,000 for the three months ended September 30, 2022, compared to $418,000 for the same period in 2021. This was primarily due to an increase in professional fees in connection with our NASDAQ uplisting, which was completed in December 2021, and the aforementioned franchise tax expense. Research and development expenses increased to $193,000 for the three months ended September 30, 2022, compared to zero for the three months ended September 30, 2021. The increase is due to the initiation of two proof-of-concept studies for drug delivery candidates utilizing our hydrogel technology. As of September 30, 2022, we had $7.4 million of cash and cash equivalents and marketable securities, which includes in investment in Treasuries of $6 million, as compared to $9.8 million as of June 30, 2022. Primary use of cash during the quarter was the repayment of $1.478 million in notes payable. We no longer have any convertible debt on our books at this time. We will continue to lower costs and burn moving forward. As of November 8, 2022, there were 5,572,234 common shares issued and outstanding. I would now like to open the call for questions. Operator?

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's press star 1 to ask a question. We'll take our first question from the line of Naz Rahman with Maxim. Please go ahead. Your line is now open.

Hi, this is Joanne Lee on the call for Naz. Thanks for taking the question. So my first question is around Next Rape. Specifically, where is the company in regards to completing any necessary testings that may be required for filing the 510 ? And is that submission still expected to occur this quarter?

Adam Levy, are you on mute?

Hi, hello.

Oh, hello. I'm sorry. I was on mute. Yes, thanks for the question, Joanne. So we are probably going to file towards the end of Q1. The delay is associated with our strategic partners indicating that cost could be an issue. So we went back to the drawing board and redesigned our throughputs and the way that we manufacture. And we've been able to reduce the cost of the product by about 55 to 60%. So now we will be manufacturing the product for testing. So it will be a couple of months delay. We anticipate two months, but not much longer than that. And we are now ready to go with a product that will be more competitively priced.

That's understandable. Thanks for the details. And then for my next question for diclofenac patch, you guys, you know, recently announced positive proofs of concept data validating its effectiveness in drug delivery. Could you guys just provide some color on what the next steps are for advancing this program? Thank you.

Sure. So, the purpose of this study was really not so much to show that we have created a better diclofenac patch, although it's early and the data could indicate that we have, but really rather to validate that we are an excellent drug delivery mechanism by showing skin penetration and permeation and retention That opens up a world of possibilities. So probably we'll take a step back. We'll begin to reach out to folks that we know would be interested in this type of product. As we've said many times, our strategy is to try to find strategic partners for these types of programs. And that's probably the next step. And then shortly thereafter, we'll start thinking about what we have to do to move the program down the pathway.

Got it. And just as a follow-up, diclofenac is commonly used in various 505B2 products. Are you guys considering this pathway as a potential avenue for developing the patch?

Yes, I think that would be the pathway. Got it.

And just my final question, how many additional launches is the company expecting to launch for Amazon for the remainder of the year and Are there any, if any, gating factors that could delay those launches? Thank you.

So, yeah, that's a great question. So we're actually going to be releasing in the next 30 days, finally, the SilverSeal 2x3 and our long-anticipated TurfGuard, which relies heavily on the antibacterial data that we have to prevent staph and MRSA in turf burn. Those products were originally scheduled, and this is where we sometimes run into issues with supply chain. Not on our own supply chain, supplying our own materials, because we inventory those very well, But new products require new pre-printed foil. And the lead time right now on foil industry-wide is between 8 and 12 months. So those products were delayed. We were counting on sales of Silver Seal and Turf Guard in Q3 and then have them really rolling in Q4. As it turns out, they'll be released late in Q4 and we'll probably have them rolling in Q1 and Q2. But those two are coming out now. And then our list of releases is pretty robust. So we anticipate those two this year and then next year probably another seven or eight products at least that are already in schedule just in the first three quarters.

Got it. Sounds great.

Really appreciate the color. Thanks again for taking the question.

Thank you. Once again, if you'd like to ask a question, let's press star one. There are no further questions at this time.

This concludes today's call. Thank you for your participation. You may now disconnect.