Earnings Call Transcript - NXGL Q3 2023

Operator, Operator

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to NEXGEL's Third Quarter 2023 Earnings Conference Call. 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 afternoon, and welcome, everyone, to the NEXGEL Third Quarter 2023 Earnings Conference Call. I'm joined today by Adam Levy, Chief Executive Officer, and Adam Drapczuk, Chief Financial Officer of NEXGEL. Before we begin, I want to remind everyone that statements made during today's conference call may be considered forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could vary significantly due to various risks, uncertainties, and other factors. For a more detailed discussion of the ongoing risks and uncertainties facing the company, 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 periodic reports filed with the SEC. The company has no obligation to update or revise any forward-looking statements unless required by law. With that, I'm pleased 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 third quarter 2023 financial and operating results. We are pleased to report a record revenue of $1.22 million for Q3, which is a 115% increase compared to the same period last year and a slight rise from the $1.17 million in revenue we achieved in the second quarter of 2023. Notably, the $2.3 million revenue we've generated over the past two quarters surpasses our entire revenue for the year 2022. This growth year-over-year was primarily driven by an uptick in contract manufacturing. Additionally, this marks our second consecutive quarter benefiting from our acquisition of a 50% interest in the joint venture with CG Labs. The return on our $500,000 investment in this joint venture, on which we recently made the final payment, has proven to be a mutually beneficial endeavor, yielding significant benefits that have contributed to our revenue growth and positively impacted our bottom line. We have yet to see the full margin benefits, which will materialize as we install and validate the new equipment, with the first set expected to come online in Q1 of 2024. We also announced a supply agreement with AbbVie to provide gel pads for their Rapid Acoustic Pulse device. AbbVie acquired Soliton, the owner of this technology, in December 2021 for $550 million after the RESONIC device showed impressive results in improving cellulite appearance. After thorough due diligence, our hydrogels were selected for the required components for each procedure. This validation by a company of AbbVie's stature highlights the uniqueness of our technology, and we are incredibly proud of this partnership. We anticipate the RESONIC device's launch next year and are making the necessary preparations for this significant revenue opportunity for NEXGEL. Our branded consumer products experienced a year-over-year growth of 54% and a quarter-over-quarter growth of 37%. This growth was led by SilverSeal, a hydrogel dressing for wounds and burns that continues to gain popularity and positive feedback. SilverSeal, which is FDA cleared and clinically proven to kill 99% of STAPH, MRSA, and STREP, has shown effectiveness in reducing scarring and pain. For years, it was a hospital-only product, and our marketing emphasizes availability for home use, resonating well with consumers. In North America, we are making substantial progress with Enigma Health to secure retail distribution, and based on our solid traction, we aim to have our products on shelves by next summer. Last quarter we updated you on our amblyopia patch; we have since launched it and shipped to about 30 ophthalmology offices, receiving very positive feedback. We are monitoring reorder rates and consumer feedback as we strategize our next rollout phase. Importantly, we have made significant improvements to our gross profit, moving from a gross loss in Q1 to a gross profit in Q2, which then improved again in Q3. Our gross margins rose sequentially to 28.1% in Q3 from 15% in the previous quarter. Our net loss in Q3 also continued to decrease, aligning with our goal to reach profitability in 2024, with losses going from $814,000 in Q1 to $695,000 in Q2 and now $552,000 in Q3. Included in our net loss for Q3 are about $95,000 in noncash items. Our cash and cash equivalents have decreased from $4.3 million at June 30, 2023, to $3.3 million at September 30, 2023. The discrepancy between our reduced net loss for the quarter and the cash decrease is due to an increase in accounts receivable and investments in property and equipment. As we mentioned last quarter, customers of CG Converting and Packaging tend to have longer payment terms, closer to 90 days, compared to the typical 30-day terms for NEXGEL's core business customers, leading to a $208,000 increase in accounts receivable during this period. We also invested $361,000 in property and equipment this quarter. Before I pass the call to Adam, I want to emphasize that Q3 was a significant quarter for us, and we have much to look forward to as we approach next year. With our expansion into retail, new markets, and our branded product line, as well as opportunities to onboard new customers, we have strategically invested in inventory and equipment to increase our capacity and automation in response to the anticipated demand for our proprietary hydrogels in 2024 and beyond. We expect to see continued year-over-year revenue growth, expanded margins, and further reductions in our net loss as we strive for profitability, which remains our top priority. Now, I'll turn the call over to our CFO, Adam Drapczuk. Adam?

Adam Drapczuk, CFO

Thank you, Adam. Today, I'll review financial highlights of our third quarter 2023 results. For the third quarter of 2023, revenue totaled $1.22 million, an increase of $653,000 or 115% as compared to $568,000 for the same period the year prior. The quarterly increase in overall revenues was primarily due to sales growth in contract manufacturing and branded products year-over-year, including revenue contribution from the joint venture formed with CG Labs. Gross profit for the third quarter of 2023 was $344,000 compared to a gross profit of $148,000 for the same prior year period. Gross profit margin for the third quarter of 2023 was 28.2% compared to 26.1% for the same period the year before. Gross margin increased sequentially to 28.2% during the third quarter of 2023 as compared to 15% during the second quarter of 2023. Total operating expenses including R&D and SG&A expenses decreased to $956,000 for the three months ended September 30, 2023, compared to $1.19 million for the prior year period. The year-over-year decrease was attributable to a decrease in total SG&A and R&D expenses period-over-period. Net loss for the quarter ended September 30, 2023, improved to $552,000 or $0.10 per basic and diluted share compared to a net loss of $1.2 million or $0.22 per basic and diluted share for the same period in 2022. Net loss also improved sequentially to $552,000 during the third quarter of 2023 as compared to $695,000 during the second quarter of 2023. As of September 30, 2023, NEXGEL had approximately $3.3 million of cash. During the quarter, the company invested in capital expenditures for new equipment and increased its capacity at the Texas facility to prepare us to execute our new supply agreements in 2024. As of November 13, 2023, NEXGEL had 5,717,629 shares of common stock outstanding. I would now like to open the call for questions.

Operator, Operator

Our first question comes from Naz Rahman with Maxim Group.

Naz Rahman, Analyst

Congratulations on the progress. I have a few questions. First, could you elaborate on the supply agreement with AbbVie for the RESONIC product, specifically regarding the market opportunity and the potential economics for NEXGEL in 2024?

Adam Levy, CEO

Sure. Nav, good to hear from you again. So look, we're under NDA with AbbVie, so I can't obviously share their forecast. We're obviously not in control of their launch. But I can say that you really couldn't ask for a much better partner in a product like this. And I can say that if they are successful, this is extremely significant and impactful revenue for us.

Naz Rahman, Analyst

Got it. And on kind of a similar note, you also signed a deal with Haleon earlier this year for a product launch by them. Do you have any updates on the product? Or do you have any potential timelines on when we could hear more about the product itself and a potential launch?

Adam Levy, CEO

Yes. That product is actually a little bit further off than the AbbVie product. So expect an update around mid '24, as they are likely targeting the end of '24, which has always been our guidance on that product.

Naz Rahman, Analyst

Got it. That's helpful. So on those two points, I have a high-level strategic question. You had a very transformative 2023 with various initiatives underway. Based on your internal discussions and recent events, what do you consider to be the most significant or potential strategic growth driver for 2024?

Adam Levy, CEO

Unquestionably, it's probably AbbVie. There's going to be some other good things, but that one is staring us right in the face.

Naz Rahman, Analyst

Do you have any thoughts on how much of your revenue could come from AbbVie?

Adam Levy, CEO

We believe this could be very significant. They invested over $0.5 billion, specifically $550 million, in this product. Given that investment, it's hard to believe they would not succeed. Although I don't have direct information due to my NDA, I cannot see them faltering with such a commitment. If they perform as we expect on this product, it represents by far the largest opportunity we have.

Naz Rahman, Analyst

Understood. On the prepared remarks, you commented a little about the amblyopia patch launch. Could you provide more color on what feedback you received from physicians regarding the patch? And I was also curious in terms of the actual use of the patch, have you found that they're being mainly given to, I guess, new patients or switches? And do you have any idea of how many patients are either new or switching, in terms of percentages?

Adam Levy, CEO

So great question. So as far as feedback, it has been terrific. Generally, they're being given to existing patients because the patients with the worst irritation and the worst issues are the ones that were using a different patch. The children are complaining. They've got those red rings around their eyes that are either blistering or were very irritated. So those are who I think the doctors are giving it to first and foremost, and then they're going to offer it to other people. As the practice goes through, patients come in every month to get a different set in. They seem to be now steadily reordering and steadily giving it to more and more patients. I think what we need to understand and don't have the full picture of yet, is exactly what percentage of their patients are going to switch to this, right? It's a slight premium or a significant premium. Actually, it's about 50% more expensive than something else you can buy on Amazon. And I think what we need to determine is if everybody is just going to like it because it feels so much better, or are really the patients that are going to use it the ones with the worst eye irritations and the worst problems. And that, of course, defines the size of the market. So we're getting a lot of feedback from the doctors. We're doing a lot of research. We're talking to some of the patients that want to tell us some great stories. And as we determine what our next step should be, that will kind of tell us where we should put our resources and how we should really try to ramp this thing.

Naz Rahman, Analyst

That was helpful. And also on that point on amblyopia, have you gotten any inquiries for potentially very large wholesale orders beyond the initial orders or reorders?

Adam Levy, CEO

So no, I mean, we've gotten some large practice orders, practices that have ordered 100 boxes at a time, but those are still small in the overall scheme of things until you get a lot of practices. I don't think we're quite ready yet, and that's part of what we're trying to determine before we engage one of those more expensive professional sales forces that might go out to a whole bunch of doctors' offices. We want to understand our product, understand the pitch, understand what we're doing because that's not cheap to engage someone like that. But when we're ready, that is definitely one of the things that we will talk about and make a plan around.

Naz Rahman, Analyst

Understood. So obviously, you have a lot of initiatives ongoing and very near-term initiatives. But I also want to talk a little bit about your pipeline. Could you provide a potential update on the progress and development of the 510(k) devices you're working on?

Adam Levy, CEO

Sure, sure. So the main thing that we had for the 510(k) devices that pushed them off was our inability to at scale and at an effective manufacturing cost to produce them with the dies and pumps that we currently have. We have tested the new prototype dive. They worked very, very well, and we’re now going ahead and ordering those guys to come in. So we're probably going to be ready to manufacture product in the next 60 to 90 days, and then we will submit it for testing and start moving those products forward again. Fortunately for us, despite that delay, we’ve had so much to work on that that’s only one project out of several. But we do think it’s an important project, and we are going to pick it back up as soon as we can manufacture it effectively.

Operator, Operator

Our next question comes from Chris Michalski.