Earnings Call Transcript - NXGL Q1 2024

Operator, Operator

Good afternoon, everyone. My name is Bo, and I will be your conference operator today. I would like to welcome everyone to NEXGEL's First Quarter 2024 Earnings Conference Call. Also, today's call is being recorded. Now, I would like to turn the call over to Valter Pinto, Managing Director of KCSA Strategic Communications for introductions. Please go ahead, sir.

Valter Pinto, Managing Director

Thank you, operator. Good afternoon, and welcome, everyone to NEXGEL's First Quarter 2024 Financial Results Conference Call. I'm joined today by Adam Levy, Chief Executive Officer; and Adam Drapczuk, 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 afternoon 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 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.

Adam Levy, CEO

Thank you, Valter, and thank you, everyone, for joining us today to discuss our first quarter 2024 financial and operating results. Following a record year of growth in 2023, I'm pleased to report our first quarter financial results that demonstrate steady year-over-year growth and readiness for the significant growth opportunities we anticipate in 2024. First quarter revenue increased by 104% year-over-year to approximately $1.27 million, surpassing our first quarter revenue guidance of $1.25 million, which we provided during our year-end conference at the beginning of April. Please note that this revenue does not include the nonrefundable deposit of $176,000 from AbbVie for their first purchase order. For the first quarter, our gross profit margin was approximately 22%, compared to a negative gross margin for the same period last year, and an increase from 14.6% in Q4 of 2023. Our strong top-line results reflect growth in both contract manufacturing and consumer branded product business segments, with revenue increasing year-over-year by roughly 58% and 178%, respectively. Sequentially, total revenue went up by approximately 17%, while the Consumer Branded Products segment saw an increase of about 57%, which reflects our first full quarter of revenue from the acquisition of Kenkoderm. While we continue our steady year-over-year growth in branded sales and contract manufacturing, we are also investing in the future growth of the business. Our investments during the quarter focused on two areas. First, we are expanding capacity in our converting and packaging facility in Texas with new state-of-the-art equipment. Secondly, we are making final investments to meet European compliance requirements. In 2023, we acquired ownership of the CG Converting and Packaging business and its facility in Texas. This facility not only provides an additional revenue stream but also gives us the flexibility to increase capacity to support new client relationships, given our strong pipeline of new customers. We are currently completing the expansion of our CG Converting and Packaging manufacturing facility to double its existing space, which will provide the capacity needed for the anticipated increased demand this year. Although the building construction is funded by our landlord, we invested $152,000 in capital expenditures for advanced automated machinery and related clean room facilities during the quarter. Moving forward, we anticipate minimal additional capital expenditures to finish the expansion, which is expected to be completed this summer. A driving factor for this investment is our partnership with AbbVie as the exclusive supplier of gel pads for their RESONIC Rapid Acoustic Pulse device, which is designed to reduce the appearance of cellulite. We still expect to launch this device by year-end and continue to collaborate closely with their team. As mentioned, we have invoiced them $176,000 as a nonrefundable deposit that will offset future orders, which hasn't yet been included in our quarterly revenue. In our Branded Consumer Products, we currently offer 31 health and beauty products sold directly to consumers and have various growth strategies that are enhancing our retail presence in North America and eventually leading to our expansion into Europe. A significant addition to our product portfolio is our newly acquired Kenkoderm product line, marking our first full quarter of revenue contribution from these six new products aimed at treating symptoms of psoriasis. The Kenkoderm line complements our existing product offerings and has contributed to our quarterly revenue growth. In Q4, we began the process of obtaining MDR compliance, which will allow us to certify all of our Class I devices for sale in the European market. The costs associated with MDR compliance carried over into Q1 as expected, amounting to $102,000. Achieving this certification is crucial for our long-term growth, especially as we have the opportunity to enter the European market through our partnership with STADA and other potential distributors. We expect to incur a final, smaller amount of fees related to MDR compliance in Q2, in preparation for the commercialization of our first products in Europe later this summer. Overall, we anticipate our expenses to normalize in the second half of 2024 as we complete the facility expansion and achieve MDR compliance. As of March 31, 2024, our cash position was $2.4 million, down from $2.7 million at December 31, 2023. In February 2024, we completed a registered direct offering led by insiders, generating net proceeds of just under $1 million under favorable terms. I feel confident in our available cash runway to support our operations moving forward. With that, I would like to turn the call over to our CFO, Adam Drapczuk. Adam?

Adam Drapczuk, CFO

Thank you, Adam. Today, I'll review financial highlights of our first quarter 2024 results. For the quarter ended March 31, 2024, revenue totaled $1.27 million, an increase of $646,000, or 104% as compared to $620,000 for the quarter ended March 31, 2023. The increase in revenue was driven by sales growth in contract manufacturing of approximately 58% and consumer branded products of 178%. Gross profit totaled $277,000 for the three months ended March 31, 2024, compared to a gross loss of $57,000 for the three months ended March 31, 2023. The increase of $334,000 in gross profit year-over-year was primarily due to the increase in consumer branded products. Gross profit margin for the first quarter of 2024 was 21.9% compared to a negative gross margin for the first quarter of 2023 of 9.2%, and a gross profit margin of 14.6% in the fourth quarter of 2023. Cost of revenues increased by $312,000 or 46.1% to $989,000 for the three months ended March 31, 2024, as compared to $677,000 for the three months ended March 31, 2023. The increase in cost of revenues is primarily aligned with the increase in revenue growth. Selling, general and administrative expenses increased by $349,000, or 43.8% to $1.1 million for the three months ended March 31, 2024, as compared to $797,000 for the three months ended March 31, 2023. The increase in selling, general and administrative expenses is primarily attributable to an increase in advertising, marketing and Amazon fees, professional and consulting fees, and compensation and benefits expenses. Research and development expenses decreased by $27,000 to $2,000 for the three months ended March 31, 2024, from $29,000 for the three months ended March 31, 2023. Net loss for the three months ended March 31, 2024, was $905,000 as compared to a net loss of $807,000 in the three months ended March 31, 2023. As of March 31, 2024, the company had a cash balance of $2.4 million, which included an approximately $1 million registered direct offering led by insiders. As Adam explained earlier, there was a net usage of cash for investment in the first quarter of 2024 due to several nonrecurring key strategic investments and acquisition costs. I would now like to open the call for questions. Operator?

Operator, Operator

We'll go first this afternoon to Naz Rahman at Maxim Group.

Nazibur Rahman, Analyst

Congratulations on the progress. I have a few. First, I want to start on the potential European launch. Could you talk a little bit more about your strategy in terms of commercialization in Europe? Like what products to initially enter the market? And which countries may you initially enter or sell out initially? Also, could you talk a little bit about how commercializing Europe is similar or different from the United States?

Adam Levy, CEO

Sure, Naz. It's great to hear from you again. Initially, as a medical device company achieving MDR compliance, our first products will be Class I medical devices. Once we pass our inspection, scheduled for the end of May, we will be able to self-certify and launch these products right away. We have received interest in Australia, the U.K., and the Nordic countries for the Hexagels, which are Class I and our second largest-selling product in the U.S. There is also considerable interest in Silverseal. However, since Silverseal is a wound care device classified as Class III, it cannot be self-certified. We realistically expect it will not be cleared until the fourth quarter, at the earliest, possibly moving to the first quarter of next year. Therefore, you can anticipate a second quarter release of next year for Silverseal. Kenkoderm has generated some interest as well, and we have smaller Eastern European and Nordic countries looking to distribute that product too. This will likely be the first step as we move forward.

Nazibur Rahman, Analyst

Could you discuss the differences in commercializing products in Europe compared to the United States and what you anticipate in that regard?

Adam Levy, CEO

Well, there are a lot of differences, and understanding a market is really important. That's one of the reasons why we're looking for distribution partners, right? So I would never really attempt to go into a place like STADA and explain to them how they should market our products in Spain or in England or somewhere where they already are and they have a successful brand. The same reason they selected us to help them understand the U.S. market. So having good partnerships and having good distribution partners is really the key. We kind of defer to what they want to do and what they do in their territories because they're the experts there.

Nazibur Rahman, Analyst

Got it. That's helpful. The next question I have is on your capacity expansion. Once you're done with all the construction work and validating all the equipment, is there an FDA inspection that is required? Are you expecting like an FDA inspection? And what might the timing of that be?

Adam Levy, CEO

Yes. No, probably not. That would be very unlikely. We're a 13485 medical device facility. ISO inspections for sure. The FDA usually only comes in very sporadically and would only come in if there were a problem, but the FDA doesn't really inspect your equipment like that for a non-drug facility like we are.

Nazibur Rahman, Analyst

Got it. And also just on a similar point, would you expect an inspection of some sort of plant inspection, any sort by AbbVie or any of your other partners regarding the expansion?

Adam Levy, CEO

They will conduct their usual annual inspections and have a requirement to come in and inspect just like we inspect them. We have just finished our inspection of the manufacturing facility at STADA for the product they will be shipping to us. Inspections are a standard part of the business and happen regularly. While I can't confirm the exact timing, the most reliable inspections are the ISO inspections, which are scheduled on a regular basis.

Nazibur Rahman, Analyst

Got it. On Kenkoderm, you had your first full quarter of launch and the first full quarter where it was under new stewardship. Could you talk about Kenkoderm's progress under NEXGEL and anything that shifted from where it was back in 2023 when it was a private label?

Adam Levy, CEO

So the main thing about it is that there were only pleasant surprises to start with. We thought that we could help in optimizing the advertising that's going very well. Of course, the optimization continues and goes along. As I mentioned earlier in the call, when you asked the other question, we now have interests in a couple of smaller territories and distributing in Europe. These are all incremental additions to something that we already own. In addition, we still haven't begun the cross-promotion. So we're working on an update and upgrade to our retail website. When that update is completed, we will then begin kind of announcing to the Kenkoderm customers, and they have about 35,000 emails and 9,000 Facebook followers that, hey, good news, we've got a sister company, use code Kenko, get 15% off, check out these products. We'll begin to cross-promote between the two companies. And that hasn't started yet. That will start when the website is completed in June.

Nazibur Rahman, Analyst

Got it. I had one last question. So if I call you guys have been going back to in-person trade shows. Could you talk a little bit about the reception and feedback you're getting relative to NEXGEL's technology and potentially new verticals or industries you might be entering with the technology?

Adam Levy, CEO

Yes. So I didn't get the first part about the trade show, Naz. What was the question there?

Nazibur Rahman, Analyst

What kind of feedback have you been getting from the trade shows...

Adam Levy, CEO

Well, we've been getting great feedback. There are some really interesting companies that are very early stage that we are making test roles for that have all sorts of applications in medical devices. How successful they'll be? And they're not huge customers now because they're ordering $5,000 or $10,000 or $15,000 worth of gel to run their experiments and develop their projects. But there seem to be lots of really cool applications for our technology. And we think a few of them could end up being very big, but most of them are still very early stage.

Operator, Operator

It appears we have no further questions this afternoon, so we will conclude today's call. Thank you for joining NEXGEL's First Quarter 2024 Earnings Conference Call. We appreciate your participation and wish you all a great evening. Goodbye.