NexGel, Inc

Good afternoon, ladies and gentlemen. Welcome to NextGel's third quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing star 1 on your telephone. And just a reminder, today's call is being recorded. And if you should need any operator assistance during the call, please press star 0. Now, at this time, I'll turn things over to Maria Holcutt, Account Director of KCSA. Strategic Communications for Introductions. Maria, please go ahead.

Thank you, Operator. Good afternoon and welcome everyone to NextGel's third quarter 2024 earnings conference call. I'm joined today by Adam Levy, Chief Executive Officer, and Adam Dropsik, 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 8-K, 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. Also, during the course of today's call, we will refer to certain non-GAAP financial measures. Reconciliation of the non-GAAP financial measures and certain additional information are also included in today's press release. With that, it's my pleasure to turn the call over to Mr. Adam Levy. Adam, please go ahead.

Thank you, Maria, and thank you everyone for joining us today to discuss our third quarter 2024 financial and operating results. The third quarter of 2024 was yet another record quarter for the company across all of our key financial metrics. Revenue for the third quarter totaled $2.94 million, an increase of 141% year-over-year and 104% sequentially. Gross profit margins for the quarter were 43.6% as compared to 28.2% for the same period last year and 28.5% in the previous second quarter. Branded consumer revenue increased 99% sequentially, while contract manufacturing revenue also increased approximately 103% sequentially, contributing to the margin expansion year over year and sequentially. Adjusted EBITDA, which is a non-GAAP financial measure, narrowed from a loss of $788,000 last quarter in Q2, 24, to $347,000 in Q3, 2024. Becoming cash flow positive has been a priority of ours. With the growth we experienced in Q3, growth which we expect to continue into Q4, we are very close to achieving this goal. In branded consumer products, The third quarter was the first full quarter of revenue contribution from our Silly George brand, a beauty and cosmetics company focused on eyeliner, fake eyelashes, lash growth serum, and mascara. As a reminder, when we acquired the brand six months ago in May, Silly George was on a revenue run rate of approximately $2 million. Since then, we have launched new products, introduced them on Amazon, and optimized our marketing. the result of which is that we are now on a $5 million run rate heading into the holidays. We also continue to see year-over-year growth from both our Kenco Derm and Medi-Gel brands. In contract manufacturing, Q2 saw the completion of the expansion of our Texas facility in order to support the new client relationships we have and the resulting increases in demand. We doubled our square footage and invested in state-of-the-art automated machinery and related clean room facilities. Due to our expansion during the second quarter, revenue was impacted by the shutting down of the facility to move equipment and validate it prior to restarting operations. Contract manufacturing in Q3 normalized, increasing from 425,000 in Q2 to 864,000 in Q3, an increase of approximately 103%. Our relationship with Stata continues to progress well. We recently announced the release of our first product, Histosolve, which is sold as Deocin 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 and headaches, gut issues, and skin conditions. In Q2, 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 manufacturing, hospitality, and public service.

As a hospital grade hydrogel dressing,

For Wounds Burns, the employees of Cintas' customers are the ideal target audience for this product. This partnership is significant to us, not only for the associated revenue, but also for SilverSeal's brand awareness. The first orders of SilverSeal are being delivered during the current fourth quarter of 2024, which will contribute to our expected revenue growth quarter over quarter. In addition to our branded products and contract manufacturing businesses, We have several aspirational shots on goal in medical device applications. In July, we announced the launch of an institutional review board IRB study conducted in accordance with FDA guidelines and funded by Innovative Optics U.S. or Vanilla, a leading global supplier of safety products and personal protective equipment for medical, surgical, and aesthetic healthcare facilities. Laser hair removal is proven to be effective in permanently removing hair. However, it can be associated with the release of a plume that contains airborne particles and hazardous organic compounds, which if inhaled, may affect the short-term and long-term health of professionals providing the treatments. So much so that presently, well over a dozen states have enacted legislation mandating the use of plume evacuation systems in order to mitigate the hazards and risks of exposure to the plume. Our high water content hydrogel potentially may offer a long-needed industry-wide solution for absorbing and capturing plume during laser hair removal when applied to the surface of the skin before the procedure begins. In addition, the application of hydrogel may also allow for more effective laser hair removal, reduce the amount of pain experienced during the treatment, and could be a practical solution for the future that meets the requirements for regulatory compliance. Together with Vanillay, we have initiated a human trial being conducted at the Florida Clinical Research Center by plastic surgeons. Our hydrogel will be applied to 30 patients prior to laser hair removal treatments, with the primary outcome measure being the reduction of plume in the air during these procedures. We expect top-line data from the study during the fourth quarter of 2024. There are many untapped potential applications for our unique hydrogel technology. Upon receiving successful data, we can launch commercially into the large laser hair removal market. We recently appointed Kip Krecker to our Scientific Advisory Board, who brings over two decades of medical device sales and management experience. He currently serves as VP of North America Sales and Microsurgical Technology, a leader in the development of advanced surgical instruments and solutions, as well as sitting on the Board of Directors at Ocular Science, a biotech company focused on cost-effective, innovative eye care products. Prior to his current roles, Mr. Kreca served in various sales leadership positions at companies including Star Surgical, Abbott Medical Optics, Stryker Endoscopy, and more. While our contract manufacturing and branded product division continue to perform well and grow significantly, we certainly feel confident that we will unlock other large commercial applications for our hydrogel. With that being said, R&D and exploration to each of these opportunities will be done so thoughtfully and strategically, managing cash appropriately and not overextending our resources, pursuing paths that will not lead to a high ROI or be core to our vision of the company's future. Looking ahead into Q4, we expect continued growth across all of our revenue lines. We expect revenue to exceed $3 million and operating cash flow to continue to improve and approach positive in Q4. As a reminder, our revenue guidance for Q4 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 those revenues to start in Q1 of 2025, and we continue to work closely with their team on the launch. Earlier this week, we completed a financing for gross proceeds of approximately $2 million at attractive terms. Insiders, including members of the management team and board of directors, participated in the offering. Insiders are subject to a six-month lockup period from the date of closing. This financing will provide us with working capital to buy inventory and increase the marketing spend for our brands and support the growth of our receivables from our large customers. With that, I would like to turn the call over to our CFO, Adam Dropsik. Adam?

Thank you, Adam.

Today, I'll review financial highlights of our third quarter 2024 results. For the third quarter 2024, revenue totaled $2.94 million, an increase of approximately 141% as compared to the third quarter 2023, and an increase of approximately 104% as compared to the second quarter 2024. The increase year-over-year and sequentially in overall revenues was primarily due to sales growth in branded consumer products and contract manufacturing. Gross profit totaled $1.28 million for the third quarter 2024, compared to a gross profit of $344,000 for the third quarter 2023, and gross profit of $410,000 for the second quarter 2024. The increase of $936,000 in gross profit year-over-year was primarily due to the increase in branded consumer products. The increase of $870,000 in gross profit sequentially was primarily due to the increase in branded consumer products and contract manufacturing. Gross profit margin for the third quarter of 2024 was approximately 44%. compared to a gross margin for the third quarter of 2023 of approximately 28%, and a gross profit margin of approximately 29% for the second quarter of 2022. Cost of revenues increased by 781,000, or approximately 89%, to 1.66 million for the third quarter 2024, as compared to 877,000 for the third quarter 2023. The increase in cost of revenues is primarily aligned with sales of branded consumer products, as both Silly George and Kinkoderm were acquired after the comparable 2023 period. Selling general and administrative expenses increased by $1.2 million, or approximately 118%, to $2.07 million for the third quarter 2024, as compared to $950,000 for the third quarter The increase in selling general and administrative expenses is primarily attributable to an increase in advertising, marketing, and Amazon fees, which increased $819,000. Net loss for the third quarter of 2024 was $754,000, as compared to a net loss of $552,000 for the third quarter of 2023. and a net loss of $979,000 for the second quarter of 2024. As of September 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 $2 million with insiders and the Board participating. 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 Sylvie George brand products. As of November 13, 2024, Nextgel had 6,790,777 shares of common stock outstanding, which number does not include the 772,272 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, Mr. Grapchick. Ladies and gentlemen, at this time, if you do have any questions, simply press star one. And if you find that your question has already been addressed, you may remove yourself from the queue by pressing star two. Again, star one, please. And we'll go first this afternoon to Naz Rahman of Maxim Group. Naz, please go ahead.

Hi, everyone. Thanks for taking my questions and congrats on the call. I just have a few. First, I just want to start at a high level. Your next year was very close to turning cash flow positive. I guess strategically, what are you sort of thinking about in terms of what happens in the next year? What do you do next when you become cash flow positive? Like what initiatives could you engage in or what projects do you take on once you sort of make that turn?

Well, it's good to hear from you again. You know, that turn is always important. And I've said this before that, you know, when you're when you're running a public company and you're not cash flow positive, you're playing defense and becoming cash flow positive allows you to switch over to offense. So there's a lot of things that we can do. We can certainly think about additional acquisitions. We can think about additional expansion. You know what those will be exactly. You know, we've always been opportunistic. So, you know, we're kind of part roll up strategy. We're trying to grow our consumer products and we have some other very large customers we're engaged with right now and continuing to develop the products with them and bringing them on board is really our focus right now.

Got it, that was helpful.

On the laser cell hair removal, study, could you talk about what the following steps would be to get that approved for that indication? Would you have to file a PMA, or what are the regulatory steps following the study readout, and what do you think would be the timeline to have your hydrogel incorporated into that procedure commercially?

So the study is really primarily, there's no real regulatory requirement for it. The study is really to show that it suppresses the plume and to allow us to commercialize. So we'll be able to make claims about suppressing the plume. We'll be able to make claims about the reduction of pain for the patients, assuming that's one of the endpoints we hit. And we'll be able to make claims for greater efficacy, which has been a pleasant surprise in the early data, but obviously we'll see what happens with that once all the data is together and we announce it later on this quarter.

Got it.

They're not funding that study?

Sorry.

No, no. That study is being funded by Banaleigh. We did not pay anything to fund that study. They're doing it because they want to be our marketing partner and distribute to the laser hair removal companies. Got it.

And I guess just one last question. we're obviously approaching the holiday season and typically your products tend to get a boost during the holiday season. And I know silly George is sort of, and that fits in that paradigm. Could you talk about what you kind of expect to see in terms of potential unit or revenue acceleration for holiday season? And I guess like at least for what products?

Yeah. So by the way, I'd never, I didn't answer your part of the question on the laser hair removal. We think revenues could start as soon as the first half of next year on that. as soon as the study results are released. So when it comes to the holiday season for Silly George, this is obviously our first season with the new products and with Silly George going into the Christmas holidays. Historically, they've seen a very nice bump up in sales during month of November as historically their best month. But one of the reasons I've been a little cagey about what we're going to do in Q4 is because having not done it before, you know, it could be Very, very big. It could be moderately big. It could be anything in the middle. I'm just not 100% sure, but we are expecting and gearing up for a very big and successful Black Friday and Christmas season.

Got it. Thanks. And one more question, if you don't mind. I know one of the initiatives you've been working on is expanding your distribution both to retail in Europe. Could you just provide some comments on where you are at on that process?

Sure. So we do have some partners in Europe now that are interested in taking the product in. I think you'll start to see some European deals come to fruition in the first half of 2025. Just some regulatory steps and things like that to jump through. And then here in the States, we are in front of Walgreens. We are in front of a couple of large retail operators. And hopefully, you know, they only do the planograms once a year. When these planograms come due, we will be selected in their And we'll start to see SilverSeal probably the first product in stores here in the U.S. sometime in 2025. We also are very close now to getting our approval for Canada, smaller market, but we should be able to soon start selling SilverSeal up in Canada, both on Amazon and at retail.

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

Thanks. Thanks, Nas.

Thank you. And just a quick reminder, Star 1, please, for questions. We go next now to Michael Gustaitis at OnePride.

Hey, Adam. Congratulations on another record quarter. I was going to ask a question about the retail, but I just heard that good news. I was wondering if you could elaborate a little bit on the laser hair removal as far as the size of that opportunity and as another aspirational project with the next straight. I was wondering if you could, um, had any potential numbers, any ballpark numbers for what those would look like. Yeah.

So the, so as far as the next rate goes, we brought Kip on to really push that program forward. Um, he's had some very interesting ideas for the use of our adhesive in other drapes that could actually be simpler and quick market. Um, it's early stage. So we'll give you more news on that as the weeks progress, but, The entire surgical drape and using our gel, which is a patented application for surgical drapes, is something that he was specifically interested in and specifically joined the company in order to move forward. As far as the size of the market in laser hair, I'm embarrassed to say that I don't know what that is. I do know it is a very, very large and growing market, but I don't have access to the data of exactly how big it is in the U.S.

Okay. Thank you very much, and congratulations again.

Okay. Thank you. We'll go next now to George Merima at Peripo Adventures. George, please go ahead. Hi. Thanks, Adam. Hi, George. How are you? Yeah, good, thanks.

Real nice improvement on the gross margins. As you look out to 25, from kind of a high-level view, as your volumes increased, I know there's a difference with the volumes and different businesses and then the product mix, but just on a broad spectrum, as your volumes go up in 25, how will gross margin move when you have higher capacity and utilization rates and such? How will that look?

Yeah, so that's a great question. I'm going to give you a kind of complicated answer. First of all, thank you for the compliment on the improvement of gross margin, but it's not entirely true in Q3. And then when I say true, that is, those are the gross margins, but remember it's skewed by the explosion in silly George. And if you notice a lot of that gross margin improvement is offset by the large increase in sales and marketing that drove our SG and a up. So it's just really, we really segment our business in terms of gross margin, because if you look at how consumer products are done, well, they have, you know, 85 to 87% gross margin. because everything's below the line. The real expenses of direct-to-consumer marketing are all advertising. So that skews really good gross margin up top. The actual gross margin from the contract manufacturing side will see tremendous improvement in Q4 because that billing is actually – the good news is that billing is actually more important to reducing our EBITDA loss and becoming cash flow positive than the silly George revenue. because that revenue is in a facility that's underutilized. So all we really have is expenses against it is cost of materials because the salaries are paid for the facilities paid for. So where you really see a larger effect in reducing our losses in terms of cashflow will be in Q4 and Q1 when Cintas and AbbVie come on board. Does that make sense?

Yeah. Yeah. No, that's exactly what I was trying to get into is the contract manufacturing side. So can you, uh, I'm going to push you a little harder. So in 25, just the contract manufacturing part, where can gross margin sort of go?

So if you segregate out gross margin, we look at a range, and we don't like to give out the exact gross margins, but we look at a range for our Texas facility of between 35% and 45%, and at our plant up in Langhorne, 40% to 50% on the medical device side. So those are the contract manufacturing margins if you are adding people and have to cover the facility costs. But since we're already paying for all the facility costs and all the people, we'll have much higher contribution to reduce our losses for every incremental dollar that we see in 2025. So that's why we're kind of feeling bullish about getting cash flow positive.

That's perfect. And then one more, if I may. On Cintas, Can you provide any color on sort of the rollout cadence, like number of doors expected or how that cadence will roll off the next year?

Well, they distribute to over a million different businesses, and it's a pretty wide distribution. We've had some experience providing them with a different product for their medical kits. We kind of have an idea of how that will sell. We know the revenue is significant. They're going to be a significant customer for us, probably more our second largest or largest customer. And, you know, again, as I said, the other real benefit is going to be I'm very excited that people will see SilverSeal in their place of work. And if you see it in your place of work and you burn yourself and you put it on your arm and it feels really good, well, next time you burn yourself at home and you're on Amazon, you know, that's a product you'll know. So both of those things we think are going to be very valuable to us.

That's very helpful. And I just want to commend you. I really – I'm happy and appreciate your acquisition there, silly George. And it looks like you sort of caught lightning in a bottle. So congrats on that. Thank you.

Thank you. Yeah, sometimes it's good to be a little bit lucky. We had some good upside in that deal when we made it, but it's also good that the product is resonating and that's fortunate.

We'll take it all. Thanks, George.

Thank you. And just a final reminder, ladies and gentlemen, any further questions today, please press star one at this time. And we'll pause for just one moment. And Mr. Levy, it appears we have no further questions this afternoon. So I'd like to turn things back to you for any closing comments.

Thank you. No, I have no closing comments, just that we're very excited that the products are working. And we look forward to Q4, which we think will be even better than Q3.

Thank you, Mr. Levy. Again, ladies and gentlemen, that will conclude today's NextGel's third quarter 2024 earnings conference call. Again, thanks so much for joining us, everyone, and we wish you all a great evening. Goodbye.