NexGel, Inc

Good afternoon. I will be your conference operator today. At this time, I'd like to welcome everyone to NextGel's second quarter 2024 earnings conference call. I would now like to turn the call over to Walter Pinto, Managing Director of KCSA, Strategic Communications for Introductions. Please go ahead.

Thank you, operator. Good afternoon and welcome everyone to NextGel's second quarter 2024 earnings conference call. I'm joined today by Adam Levy, Chief Executive Officer, and Adam Drapsik, 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.

Thank you, Walter, and thank you, everyone, for joining us today to discuss our second quarter 2024 financial and operating results. The second quarter of 2024 was a record revenue quarter for the company, totaling $1.44 million, an increase of 23.4% year-over-year and 13.8% sequentially. Branded consumer products revenue was a key growth driver, totaling $968,000 as compared to $259,000 in June of 2023. Included in the year-over-year branded customer product revenue comparison is our Kinkoderm product line, which we acquired in December of 2023, and about half a quarter of contribution from our new acquisition of Silly George. Silly George offers its loyal customer base a full product line of eye and eyelash products, including hassle-free alternatives for eyelashes and eyelash care, such as lash extensions, lash serum, and various accessories. Tilly George is predominantly sold direct to consumer, not only in the United States, but internationally as well. Tilly George has built a large social media following and consumer database, which includes 88,000 Facebook and 83,000 Instagram followers, as well as over 250,000 unique customer emails. When we acquired the brand, its revenue rate was approximately 2 million. Since then, we have launched new products, such as a new line of pop-on lashes, leveraging new gelash technology to create non-toxic, long-wear eyelash extensions that are easy to apply and remove and can last for 5 to 10 days. We also implemented new marketing strategies. We acquired Silly George in May for $600,000 in cash, common stock, plus a future earn-out. In short order, and as a result of new products and marketing, as we announced in July, I am pleased to confirm Silly George continues to perform well. and that July sales alone were over 380,000 on Shopify only. While consumer product sales can fluctuate, we continue to be excited with our acquisition. Additionally, we are only just now releasing our pop-on lashes on Amazon. In the contract manufacturing side of our business, we completed the expansion of our capacity in Texas to support the new client relationships that we have. We doubled our square footage and invested in state-of-the-art automated machinery and related clean room facilities. During the quarter, we had some remaining capital expenditures related to this expansion in the amount of $209,000 and expect that number to be minimal in the back half of the year now that we have completed the expansion. Due to our expansion in the quarter, revenue was impacted as we shut down the facility for a period of time to move equipment and validate it prior to restarting operations. We expect revenue to be more normalized going forward in Q3 and Q4. Our relationship with Stata continues to progress well. We recently announced our first product, Histosolve, which is sold as Deicin in Europe. This is Europe's number one selling diamine oxidase enzyme supplement, generating well over 20 million in annualized revenues to treat histamine food intolerance, which can cause migraines, headache, gut issues, and skin conditions. We have just launched His Dissolve on Amazon and our marketing campaign starting this month. Subsequent to the quarter, we announced a supply agreement with Cintas Corporation, a leading provider of corporate identity uniforms, first aid, and safety products and services to over 1 million businesses across North America to distribute our flagship product, Silver Seal. Cintas will distribute Silver Seal to its customers in many sectors such as hospitality and public service. As a hospital grade hydrogel dressing for wounds and burns, the employees of Syntas' customers are the ideal target audience for this product. This partnership is significant to us not only for the associated revenue, but also for Silver Seal's brand awareness. We expect the first order of Silver Seal to be delivered during the fourth quarter of 2024. We recently issued revenue guidance for the third quarter of $2.2 million, an increase of 83% year-over-year, and for the fourth quarter of $2.6 million, an increase of over 140% year-over-year. Our revenue guidance still does not incorporate any revenue from our partnership with AbbVie as the exclusive supplier of gel pads for their Rhizonic Rapid Acoustic Pulse device for reduced cellulite appearance. We still expect revenues to start in Q1 of 2025, and we continue to work closely with their team on the launch. At this higher expected quarterly revenue level in Q3 and Q4, we are getting very close to achieving our goal of generating positive cash flow from operations. Lastly, earlier this week, we completed a financing led by insiders for gross proceeds of $1.11 million at attractive terms. This financing will replenish our balance sheet with the investment dollars we spent for Silly George and also provide us with working capital to buy inventory and increase the marketing spend for the brand. With that, I would like to turn the call over to our CFO, Adam Drapsik. Adam?

Thank you, Adam. Today, I'll review financial highlights of our second quarter 2024 results. For the quarter ended June 30th, 2024, revenue totaled $1.44 million, an increase of $273,000, or 23.4%, as compared to $1,117,000 for the quarter ended June 30, 2023. The increase in revenue was driven by sales growth in branded consumer products, including approximately 45 days of revenue from Silly George, partially offset by a decrease in contract manufacturing. Contract manufacturing was impacted by CGN's move into its new facility and will normalize and grow in Q3 and Q4. Gross profit totaled $410,000 for the three months ended June 30, 2024, compared to a gross profit of $175,000 for the three months ended June 30, 2023. The increase of $235,000 in gross profit year-over-year was primarily due to the increase in branded consumer products. Gross profit margin for the second quarter of 2024 was 28.5%. compared to a gross margin for the second quarter of 2023 of 15% and a gross profit margin of 21.9% in the first quarter of 2024. Cost of revenues increased by $38,000, or 3.8%, to $1,030,000 for the three months ended June 30, 2024. as compared to $992,000 for the three months ended June 30, 2023. The increase in cost of revenues is primarily aligned with sales of branded consumer products, partially offset by a decrease in cost of revenues from lower contract manufacturing revenue. Selling, general, and administrative expenses increased by $506,000, or 57.4%, to $1,390,000 for the three months ended June 30, 2024, as compared to $882,000 for the three months ended June 30, 2023. The increase in selling, general, and administrative expenses is primarily attributable to an increase in advertising, marketing, and Amazon fees, attributable to promotions related to Kinkoderm and Silly George. We expect these costs to increase in Q3 with a full quarter of Silly George revenue and with further growth in branded consumer products. Research and development expenses increased by $21,000 to $76,000 for the three months ended June 30, 2024, from $55,000 for the three months ended June 30, 2023. Net loss for the three months ended June 30, 2024 was $979,000, as compared to a net loss of $642,000 in the three months ended June 30, 2023. As of June 30, 2024, the company had a cash balance of approximately $1.1 million. Subsequent to the end of the quarter, the company closed on a registered direct offering of $1.11 million led by insiders. The use of proceeds for the financing is for working capital, and the immediate requirement for additional inventory and marketing to meet the higher-than-expected demand for the Silly George brand products. The company believes it has sufficient cash and marketable securities to operate its business plan into 2025. As of August 14, 2024, Nextgel had 6,324,266 shares of common stock outstanding. which does not include the 444,000 shares of common stock we anticipate issuing in connection with our recent offering. I would now like to open the call for questions.

Operator?

Thank you. And ladies and gentlemen, if you would like to ask a question, please press the star followed by the 1 on your telephone keypads. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star one to ask a question. We'll pause for a moment to allow the questions to enter the queue. We'll take our first question while we wait from Bill Odenshaw from Cova Capital Partners. Please go ahead.

Hi, Adam and team. I have two questions. One's relative to the quarter in Silly George. I'm just trying to get a little more clarity on it. In your press release, you said that Silly George did more than $380,000 in July in revenues, only on Shopify and not including Amazon. That's correct. So if you annualize that, I'm just trying to get an idea of your expectations of the success of revenues. If you annualize the $380,000, it's $4.5 million on the year. Your guidance for the third quarter is $2.2 million in sales, and guidance for the fourth quarter is $2.6 million in sales. So will this impact the second half of the year if July is indicative of what's going on in the business? How do you guys look at this?

So consumer products are always tough. Thanks for the question, Billy. Consumer products are always tough because of their unpredictability. Right now, it appears very, very strong. When we made those projections, we were at a lower run rate, and the run rate is growing. We are hopeful, and the reason we are going to increase our spend a little bit is because we believe there's an excellent chance that that product line continues to grow and will end up being an amazing acquisition. So, yeah, if it continues to grow at that pace, then we're probably going to perform really well in the second half. Okay. It's always an if with a consumer product, though, buddy.

Yeah, I got it. I got it. And the second question is relative to Cintas. So when should we start to expect revenues from Cintas? And I'm not sure – Have you, Caleb, have you given any guidance or expectations as to what kind of dealers could be?

So revenue from Cintas is going to start in the fourth quarter. In fact, the orders for the gel required for CG converting and packaging to make the product have already been placed with us, and that gel is already in manufacture, but the products will ship in Q4. It is a very important part of our drive to try to become cash flow positive because, you know, while consumer product revenues are fantastic and our margins are very good, you know, because of the fixed costs both at CGN and at Nextgel, contract manufacturing dollars actually mean more to the bottom line, almost three to one. So we're very excited about that revenue stream starting as well as another large customer that we recently onboarded. The Cintas opportunity is certainly in the fourth quarter.

multiple hundreds of thousands of dollars and it will continue with a reorder pattern um and uh they said it will be significant revenue and i'm sorry i had one last question it's relative to abby so in your press release in july you put these with the expectations of third quarter and fourth quarter revenue out um and you also stated that this these expectations are without any revenues predicted from abby Can you give us an idea where that, what the status is with AbbVie and maybe a little, if you can drill down on the timing, first quarter, second quarter, what you're kind of expecting?

Yeah, so we communicate with AbbVie regularly, although not as much since we're now done in design lock. Our original expectation was that revenues would start in Q3 right now. And then we did announce that, you know, AbbVie had a delay due to their console. And so the revenues, everything was delayed. The whole project launch was delayed six months. That puts us into revenues starting in Q1. Now that is the soft launch part. So the revenues will begin in Q1 and they will ramp as we move into Q2 and then full launch in Q3. But the revenues are decent and will start, you know, in Q1. So that's when we expect to have AbbVie become accretive to our bottom line.

Perfect. Got it. Thanks, bud. Appreciate it.

Okay.

Thank you. Next, we're going to remind everyone it is star one for a question, and we'll next go to Eric Ramos with Titan Capital Management.

Hi, Adams. I just wanted to say congrats on the quarter. And I have a few questions, if that's okay. One of them is kind of starting with the silly George. You guys are obviously saying that you guys have really high win-win revenues with just Shopify, right? And I was kind of wondering how you expect that to evolve with the addition of Amazon and then what you kind of think the growth margin looks like as you kind of start paying those seller fees to Amazon as well. Does that stay kind of consistent or does that kind of decline?

So that's a great question. You know, the answer about how Amazon will affect the Shopify sales, quite frankly, is I don't know. I've never seen a product go this big on Shopify before Amazon even existed. So overall, we anticipate Amazon to be accretive. What I don't know yet is of the shoppers and of the billing that we do, for every dollar we do on Amazon, are we stealing 25 cents from Shopify? Are we stealing 50 cents from Shopify? How does that break down? As far as the margins go, we look at both of them very similarly. And the biggest control that you have in direct-to-consumer business is your cost of advertising. And we just create an allowable on Amazon where the audience already exists. that is a much lower advertising, I call it tolerable ACOS and taco that, that, that allows for that extra commission that Amazon charges so that the results are about the same. So we try to get the same margin on both Amazon and Shopify to make us kind of agnostic as to where the customer goes. We just want the customer journey to be as simple as possible. But as far as how cannibalistic Amazon will be I'm not sure, never seen it before. Did that answer your question?

Yeah, no, definitely. And then another thing, I was kind of curious about the Rasonic agreement. I don't know how much you're able to share, but can you maybe give us your kind of baseline expectations for pricing for treatment as well as kind of the amount of treatments you expect to see on, you know, like a daily, monthly, yearly basis for each of these machines?

So we don't really know how many treatments there will be other than some internal projections of demand, which were under NDA for that, that, you know, we got from AbbVie. And of course the success of the machine is going to determine that. I can tell you that these are large pads. They're eight by eight pads. Each procedure uses at least two of them. And depending on the packaging choice that AbbVie has selected, it's either it's somewhere between the range of $3 and 50 to $5 a pad. So double that per treatment.

That's really helpful. And then are you able to give any kind of insight into what you think the gross margins on those kind of sales journals like?

Yeah. So the gross margins kind of flow through two places because we treat CG converting and packaging or CGN, as I call it, as a arm's length transaction. You know, they're going to have margins much like, you know, medical device contract manufacturing in that 30, 35, you know, 40% range, somewhere between 30 and 40. And, but they're buying the gel from us. So we also make additional margin on that. So it's not unreasonable to expect greater than 50% margin overall.

Gosh, that's really helpful. I think that's all I had. Thank you guys so much. Thank you.

Thank you. And ladies and gentlemen, that is star one for a question.

We'll pause for a moment.

And with no further questions in the queue, we're going to turn the call back to Mr. Adam Levy for final remarks.

Thank you, operator. And thanks, everybody, for joining the call. You know, we've worked very hard in Q1 and Q2 to sort of set ourselves up for success in Q3 and Q4. And I think everything that we've built towards will come to fruition in Q3 and Q4. So we're very anxious and excited to get there and get to the results from those quarters because we've done a lot of work and made a lot of investments to get us to this point so thank you all for staying with us and supporting the company and hopefully you will be impressed by what actually happens in q3 and q4 thank you that does conclude today's program thank you for your participation you may disconnect at any time