Earnings Call Transcript - NXGL Q1 2023

Operator, Operator

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to NEXGEL, 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 Valter Pinto, Managing Director of KCSA Strategic Communications, for introductions. Please go ahead.

Valter Pinto, Managing Director

Thank you, operator. Good evening, and welcome, everyone, to the NEXGEL First Quarter 2023 Earnings 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 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 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 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 remain 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 normalize 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 1, 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, CG 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 goods 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, Haleon. This was after they conducted extensive testing of our proprietary hydrogels as a candidate for their health care and consumer applications. We are very excited to have been selected by Haleon and are thrilled for this opportunity to work with them. As part of the agreement, we will supply Haleon 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 1 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 our proprietary hydrogel platform as well as support and accelerate NEXGEL's long-term growth. 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 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 in 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 $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 31, 2023, from $24,000 for the three months ended March 31, 2022. Net loss for the quarter ended March 31, 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, NEXGEL 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, NEXGEL had 5,614,028 shares of common stock outstanding. I will now open the call for questions. Operator?

Operator, Operator

Your first question comes from Naz Rahman from Maxim Group.

Nazibur Rahman, Analyst

Congratulations on a successful quarter. If you don't mind, I have a few questions. I'd like to start with your guidance. Could you provide more details on what contributes to the $1 million? What gives you confidence or visibility that you will achieve $1 million in Q2? Does this also include any existing contracts with CG Labs or any planned work there that would contribute to that?

Adam Levy, CEO

Naz, good to hear from you again. So we are very confident about it because we're already halfway through the quarter, and we see trends both on Amazon as well as existing contracts 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 $1 million, you have to say, okay, it includes 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 NEXGEL's case, one of our two largest customers because those sales don't count for us anymore.

Nazibur Rahman, Analyst

Got it. Understood. And you guys also talked a little about your COGS and gross margin improvement. Can you sort of give, I guess, more color on what do you think the cadence of that improvement will be? Do you think it will be more significant in like, let's say, the second half or the fourth quarter? Or do you think it should be like continuous through from Q2 to Q4?

Adam Levy, CEO

I believe you will notice a significant improvement in COGS starting in Q2, but it will become even more apparent in Q3 and Q4. We found that offering samples when launching a new product is very effective. Some of these samples are at a higher price point, and we have distributed a considerable number of samples for amblyopia to doctors' offices to generate interest. We have been providing free samples to their patients to help them get used to the product. This strategy, along with our successful giveaways for seeding on Amazon and sales of our branded products, led us to manufacture a large quantity of product in Q1. Some of this will also be seen in Q2 as strictly cost of goods since we will be giving them away rather than selling them.

Nazibur Rahman, Analyst

Got it. And you actually kind of brought up my next question. It's actually on the amblyopia patch. I know it's sort of early days, but what kind of feedback have you been receiving from HCPs 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?

Adam Levy, CEO

So the response so far from the doctors' 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 really like them. It's a little early for us nor do we have the kind of feedback for me to say, yes, 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.

Nazibur Rahman, Analyst

Can you discuss the diversity of your customer base? Are most of the prescriptions coming from a small group of practitioners, or do you see a wider range of customers? Additionally, while you've mentioned receiving requests for more samples, have there been any requests for larger bulk orders?

Adam Levy, CEO

Yes. So we have. Depending on the size of the practice, we've gotten preorders ranging from five boxes to try it out to 100 boxes to 200 boxes. So it really depends on how many pediatric ophthalmologists are in the practice like anything else. It varies widely. I'm sorry. What was the first part of your question again?

Nazibur Rahman, Analyst

Yes. I was also asking about like the breadth of customers. Are you just seeing like, I guess, a few practices writing a lot of scripts? Or is it like a large diversity of practices writing?

Adam Levy, CEO

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, or putting this patch on their eyes. They're the ones that can speak to them about this as 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 Milk of Magnesia to try to relieve the irritation and the pain that these kids are suffering. And we're trying them to put Milk of Magnesia around their eye and then put the patch over that.' So this would 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 on getting the product out to them, getting them to try the product, and then taking preorders from them. So we've taken preorders from quite a number of practices already at this point in anticipation of our June launch.

Nazibur Rahman, Analyst

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?

Adam Levy, CEO

Yes, the interest is spread across the country based on our meetings at APOS. We identified about 150 different practices that showed strong interest and require follow-up. Some of these practices are international, with notable interest from Israel, Italy, and other locations. However, our main focus is currently on the U.S. It's fairly distributed, with some practices in the Midwest, others on the West Coast, and many in the Northeast. We still need more data to determine where the strongest interest geographically lies.

Nazibur Rahman, Analyst

Got it. And just I guess one last question to touch more on the hydrogel line. You guys obviously got a lot of traction in that brand line at this point, basically a couple of years past launch. Have you given any consideration or are you thinking about potentially going into like physical retail spaces, like pharmacies or other types of outlets?

Adam Levy, CEO

Yes, that's a great question. That's exactly what we're doing now. We're currently in discussions about distribution deals and potential branded partnerships with some larger pharmacies. We're also talking with a few foreign companies about possibly distributing our products in Europe and beyond. This is the next logical step for us. I've been very cautious about entering retail too soon because if you go into retail without fully understanding your product, you risk various challenges. Retailers may charge high fees and might require expensive display setups. If the product doesn't sell, it gets returned, and your reputation suffers. We intentionally held back until now, and the distributors we're speaking with are pleased that our product hasn't been shown before. We're at a stage where we have three key products that are fully ready for retail, and that will be our next focus.

Nazibur Rahman, Analyst

Once again, congrats on the quarter.

Adam Levy, CEO

Thanks, Naz.

Operator, Operator

Thank you. This concludes the question-and-answer session. This concludes today's conference call. You may disconnect your lines, and thank you for participating. Have a pleasant day.