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spk00: Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to NextGel Inc.' 's first quarter 2023 earnings conference call. Please be advised that today's call is being recorded. I will now turn the call over to Walter Pinto, Managing Director of KCSA Strategic Communications, for introductions. Please go ahead.
spk03: Thank you, operator. Good evening and welcome, everyone. to the NextGel First Quarter 2023 Earnings Conference Call. I'm joined today by Adam Levy, Chief Executive Officer, and Adam Drabczyk, 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 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. With that, it's my pleasure to turn the call over to Mr. Adam Levy. Adam, please go ahead.
spk06: Thank you, Walter, and thank you, everyone, for joining us today to discuss our first quarter 2023 financial and operating results. During the first quarter of 2023, we continued our strong momentum from 2022, generating revenues of $620,000 compared to $396,000 in the first quarter of last year. This 57% year-over-year growth reflects sales growth in both our contract manufacturing and branded consumer products. Q1 also includes one full month of revenue from our newly formed joint venture, CG Converting and Packaging, which I'll discuss in more detail shortly. On our last conference call, we noted that in the fourth quarter of last year, we saw a slowdown within the Amazon marketplace, even though our product rankings remained steady. This impacted our branded consumer product sales and our overall sales mix during that quarter. We also remarked how these sales were starting to improve in the first quarter. I am happy to say that as anticipated, we saw Amazon sales normalized in the first quarter of 2023. Same product sales of established SKUs returned to their previous levels, and we saw positive traction with our new product launches. In Q1, we spent more on various types of advertising and social media influencers to support those new product launches, as well as our existing SKUs. Halfway through Q2, we are seeing the positive results of this investment. Amazon sales are up 90% year over year for this period, driven by both the new products as well as increased sales of our existing SKUs. Related to support for the new product launches for the first quarter, we reported a gross loss of 9.2% compared to a gross loss of 5.6% in the first quarter of last year. The increase was mainly due to the increased production of promotional materials and customer product samples to support our new product line growth. As we continue through 2023, we expect gross margins will improve to more normalized levels, reflecting larger production runs, which should absorb more of the fixed facility expenses. Turning to operations and corporate updates. In the first quarter, on March 1st, we acquired a 50% interest in a joint venture with CG Labs to create CG Converting and Packaging LLC. As part of this transaction, we are contributing a cash investment to the joint venture, for equipment and facility upgrades, as well as general corporate purposes. Prior to this transaction, TG Labs Converting and Packaging Division was already a successful and profitable business. It was also one of our larger customers for over 15 years. This transaction immediately increases our converting capacity. Longer term, we expect it will improve our margins and streamline our supply chain. We also expect to realize considerable synergies that will allow us to onboard potential large new finished good customers that previously we simply didn't have the resources to fully service. As well as smaller customers that were not practical for CG Labs to onboard previously. We also anticipate further benefits by leveraging our combined marketing and customer outreach. The integration has been progressing well since we closed this transaction in March. and we expect it will be accretive to earnings in the second quarter of 2023. Following this transaction, later in the quarter, we signed a services agreement with GlaxoSmithKline's consumer healthcare company, Halion. This was after they conducted extensive testing of our proprietary hydrogels as a candidate for their healthcare and consumer applications. We are very excited to have been selected by Halion and are thrilled for this opportunity to work with them. As part of the agreement, We will supply Halion with a new white label product currently scheduled to launch late in 2024. We continue to onboard other new customers and expect to release more branded consumer products in the coming months. Based on the dynamic changes to our business, including the March 1st joint venture, I feel it's important to provide a one-time exception to our policy of not providing guidance. Due to our progress to date and the recent developments I just outlined, We currently expect to generate consolidated revenue of $1 million for the second quarter of 2023. We expect this revenue growth to be driven by both organic growth of existing branded consumer products, the first full quarter of new products after their launch in Q1, and from realizing the benefit of a full quarter from our joint venture with CG Labs. With all the progress we made during the first quarter and our planned product launches in both 2023 and 2024, We believe we have built a solid foundation to drive increased sales performance and improve our margins. At the same time, as I've mentioned on prior calls, we will continue to opportunistically invest in ways that we believe will enable us to unlock the enormous potential of a proprietary hydrogel platform, as well as support and accelerate NextGel's long-term growth. With that, I would like to turn the call over to our CFO, Adam Drapsik.
spk04: Adam? Thank you, Adam. Today I'll review financial highlights of our first quarter 2023 results. For the first quarter of 2023, as Adam mentioned, revenue was $620,000 compared to $396,000 in the first quarter of 2022. This 57% year-over-year growth was primarily due to sales growth in both our contract manufacturing and branded products. During the first quarter, we saw our sales mix return to more normalized levels. following the aforementioned issues we experienced at Amazon that Adam discussed earlier. As a result, we expect branded product revenue to remain closer to 50% of total sales, with the remaining 50% split between the other lines of business. In the first quarter of 2023, branded product revenue was 51.6% versus 44.4% for contract manufacturing revenue. Gross loss for the first quarter of 2023 was 57,000, compared to 22,000 for the same period in 2022. Gross margin loss for the first quarter of 2023 was 9.2%, compared to a gross margin loss of 5.6% for the first quarter of 2022. The increase in the loss was mainly due to the increased manufacturing of promotional materials and customer product samples to support our new product line growth. Based on our projected revenue growth for Q2 2023, we expect significantly improved gross margins. Cost of revenues was $677,000 for the quarter ended March 31, 2023. An increase of 62% compared to $418,000 for the quarter ended March 31, 2022. Total operating expenses, including R&D and SG&A expenses, increased to $826,000 for the three months ended March 31, 2023, compared to $790,000 for the prior year period. The year-over-year increase was primarily attributable to the factors I described earlier, including higher expenses related to new product line growth. Other factors included increased Amazon selling fees as well as an increase in advertising and marketing. This was partially offset by lower investor and shareholder services expenses due to the initial fees we incurred in 2022 related to our NASDAQ listing. Research and development expenses increased slightly by $5,000 to $29,000 for the three months ended March 31st, 2023, from $24,000 for the three months ended March 31st, 2022. Net loss for the quarter ended March 31st, 2023, improved to $815,000 or $0.15 per basic and diluted share, compared to a net loss of $1.8 million or $0.33 per basic and diluted share for the prior year period. As of March 31, 2023, NextGel Consolidated had approximately $5.8 million of cash and cash equivalents and marketable securities, which includes an investment in treasuries of $5 million. As of March 31, 2023, NextGel had 5,614,028 shares of common stock outstanding.
spk02: I will now open the call for questions. Operator?
spk01: Thank you, sir.
spk00: Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone phone. Again, that's star followed by the number one on your touchtone phone. If you would like to withdraw your request, please press star followed by the number two.
spk01: Please stand by while we compile the Q&A roster. Your first question comes from the line of Naz Rahman from Maxim Group. Please go ahead.
spk05: Hi, everyone. Thanks for taking my questions, and congrats on a great quarter. I have a few questions if you don't mind. I'm just going to start on your guidance. Did you kind of give us more color on what are the contributors to the $1 million and what kind of gives you confidence or visibility that you'll generate $1 million into Q2? Does it also include like any potentially pre-existing contracts with CG Labs, like any work they already planned on doing that was going to contribute to that?
spk06: So that, hey Naz, good to hear from you again. So we're very confident about it because we're already halfway through the quarter and we see trends both on Amazon as well as existing contract and orders that have already come in for the quarter. Our sales with CG Labs don't count towards our revenues anymore. So when you look at the million dollars, you have to say, okay, include sales that CG is going to make because we're consolidated. It includes an increase in our sales, a substantial increase in our sales based on what I'm already seeing halfway through the quarter. But then we have to back out, in Nextgel's case, one of our two largest customers because those sales don't count for us anymore.
spk05: Got it. Understood. And you guys also talked a little about your COGS and gross margin improvements. Could you sort of give, I guess, more color on what do you think the cadence of that improvement Do you think it will be more significant in, like, let's say the second half of the fourth quarter? Or do you think it will just be, like, continuous from Q2 to Q4?
spk06: I think you'll see the COGS improve dramatically starting in Q2, but you'll really see it kick in in Q3 and Q4. One of the things that we discovered was that one of the best things we could do when we launched a new product was give away samples. And some of these samples are higher priced and we've given away a significant number of samples on amblyopia to the doctor's offices to generate interest. We've been giving them free samples for their patients to get the patients used to it. So that combined with the giveaways that we've discovered work really well for seeding on Amazon and our branded product sales. resulted in us manufacturing a lot of product in Q1, and some of that will be also reflected in Q2 that are just strictly cost of goods because we're not going to sell them. We're just going to give them away.
spk05: Got it. And you actually kind of brought up my next question. It's actually been on the amblyopia patch, and it's sort of early days, but what kind of feedback have you been receiving from ACPs that have used the product? And also, are you seeing that children are sort of sticking with your hydrogel patch as opposed to the existing patches?
spk06: So the response so far from the doctor's offices has been phenomenal. It's been really great. They've thanked us so much. They've requested more samples. They're telling us their patients, you know, really like them. It's a little early for us, nor do we have the kind of feedback for me to say, yeah, a child's using our patch more and is sticking with it compared to something else. We don't have that sort of feedback yet. But the feedback from the actual practitioners has been overwhelmingly positive.
spk05: Got it. And on the practitioners themselves, can you sort of talk about the breadth of the customers? Is it right now it's like a small segment or a small amount of practitioners prescribing most of the product, or are you finding that it's relatively diverse in terms of your customer base? And have you been getting, I know you mentioned there are people requesting more samples, but have you also gotten requests or I guess larger bulk orders for the product?
spk06: Yeah, so we have. Depending on the size of the practice, we've gotten pre-orders ranging from five boxes to try it out to 100 boxes to 200 boxes. So, you know, it really depends on how many pediatric ophthalmologists are in the practice like anything else. It varies widely. I'm sorry, not the first part of your question again?
spk05: Yeah, I was also asking about the breadth of customers. Are you just seeing, I guess, a few practices writing a lot of scripts, or is it a large, diverse group of practices writing?
spk06: So right now, we're focused on the pediatric ophthalmologists. They're the ones at the front line who understand what the kids are going through. They're the ones that have a choice of directing them to the traditional pirate patch, the glasses patch, put this patch on your eyes. They're the ones that can speak to them about this is an alternative. And one of the things that we noted when we went to the APOS conference back in March was, I would say a very high percentage, 20 or 30% of the doctors came up and said, oh my God, this is exactly what we need because we're even using like milk of magnesia to try to relieve the irritation and the pain that these kids are suffering. And we're telling them to put milk of magnesia around their eye and then put the patch over that. So this will be a godsend for them. And that's basically the feedback we've gotten. So right now, those are our KOLs as well as our distribution network. And we're very focused about getting the product out to them, getting them to try the product, and then taking pre-orders from them. So we've taken pre-orders from quite a number of practices already at this point in anticipation of our June launch.
spk05: Got it. And in terms of the practices themselves, are you finding that there's any geographical areas that you're seeing strong order pools from? Or is it like relatively, I guess, distributed across the country?
spk06: Yeah, it's distributed across the country based on who we actually met at APOS, the first targets that we're going for. We came back with about 150 different practices that gave us strong indications of interest that we had to follow up with. Now, of that number, some of them were international. There were some international doctors there. We got a lot of interest from Israel and from Italy and a few other places, but right now we're focused on the U.S. first. And it's spread out everywhere. We've got Midwest, we've got some on the West Coast, we've got a lot in the Northeast. It's really, we haven't got enough of a pattern yet to say geographically where it's strongest.
spk05: Got it. And just, I guess, one last question, and this is actually more on the metal gel line. You guys obviously got a lot of traction in that brand line at this point, basically a couple years past launch. Have you given any consideration or are you thinking about potentially going into physical retail spaces like pharmacies or other types of outlets?
spk06: Yeah, that's a great question. That's exactly what we're doing now. We're currently talking to folks about distribution deals, potential branded deals with some of the larger pharmacies. We're in discussions with a few foreign companies about possibly distributing us in Europe and beyond. So that is the next logical step. We now Look, I was very, very cautious about going to retail. I've said it a million times that if you go to retail too soon, you don't understand your product, you don't know if the product is viable, they'll take the product, they'll charge you an arm and a leg for it, they'll tell you you need an expensive end cap, it will sit on the shelves, it will not sell, they will return it all, and they won't pay you, and the product is tainted forever. So we held back on purpose, but now we've reached a point, and by the way, the people that we're talking to for distribution are very pleased that the product's never been shown before. We're now at the point where we have three hero titles or three hero SKUs that are absolutely deserving of going to retail, and that's going to be our next focus.
spk02: Got it. Thanks for taking my questions, and once again, congrats on the quarter. Thanks, Seth.
spk01: Thank you. This concludes the question and answer session.
spk00: This concludes today's conference call. You may disconnect your lines, and thank you for participating. Have a pleasant day.
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