Nexgel Inc

NASDAQ:NXGL

Earnings Call Transcript 2023-Q1

[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]

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, executive]

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 1 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 good 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 onetime 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 a 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, executive]

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 3 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 3 months ended March 31, 2023, from $24,000 for the 3 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 Instructions] Your first question comes from the line of Naz Rahman from Maxim Group.

[Nazibur Rahman, analyst]

Congrats on a great quarter. I have a few questions if you don't mind. I'll just start -- I just want to start on your guidance. Could you kind of give us more color on what are the contributors to the $1 million? And what kind of gives you confidence or visibility that you'll generate $1 million in Q2? Does it also include like any potentially preexisting contracts with CG Labs like any work there which you planned on doing that was going to contribute to that?

[Adam Levy, executive]

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, 1 of our 2 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 2Q to 4Q?

[Adam Levy, executive]

I think you'll see the COGS improve dramatically starting in Q2, but you'll really see it kick in, in Q3 and Q4. One of the things that we discovered was that one of the best things we could do when we launched a new product was give away samples. And some of these samples are higher priced, and we've given away a fair -- a significant number of samples on amblyopia to the doctors' offices to generate interest. We've been giving them free samples for their patients to get the patients used to it.

So that, combined with the giveaways that we've discovered work really well for seeding on Amazon and our branded product sales, resulted in us manufacturing a lot of product in Q1, and some of that will be also reflected in Q2 that are just strictly cost of goods because we're not going to sell them. We're just going to give them away.

[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, executive]

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]

Got it. And on the practitioners themselves, can you sort of like talk about, I guess, the breadth of the customers? Is it right now like a small segment or small amount of practitioners prescribing most of the product? Or are you finding that it's relatively diverse in terms of your customer base? And I know you've been getting -- I know you mentioned there are people requesting more samples, but have you also gotten requests or, I guess, larger bulk orders for the product?

[Adam Levy, executive]

Yes. So we have. Depending on the size of the practice, we've gotten preorders ranging from 5 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, executive]

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, put this patch on your 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 like 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 about 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, executive]

Yes, it's distributed across the country based on who we actually met at APOS. So the first target they we're going for. We came back with about 150 different practices that gave us strong indications of interest that we had to follow up with. Now of that number, some of them were international. There were some international doctors there. We've got a lot of interest from Israel and from Italy and from a few other places. But right now, we're focused on the U.S. first. And it's spread out everywhere. We've got Midwest. We've got some on the West Coast. We've got a lot in the Northeast. It's really -- we haven't got enough of a pattern yet to say geographically where it's strongest.

[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, executive]

Yes, that's a great question. That's exactly what we're doing now. We're currently talking to folks about distribution deals, potential branded deals with some of the larger pharmacies. We're in discussions with a few foreign companies about possibly distributing us in Europe and beyond. So that is the next logical step.

We now -- look, I was very, very cautious about going to retail. I've said it a million times that if you go to retail too soon, you don't understand your product, you don't know if the product is viable, they'll take the product. They'll charge you an arm and a leg for it. They'll tell you, you need an expensive end cap. It will sit on the shelves. It will not sell. They will return it all. And they won't pay you, and the product is tainted forever.

So we didn't -- we held back on purpose, but now we've reached a point -- and by the way, the people that we're talking to for distribution are very pleased that the product has never been shown before. We've now reached a point where we have 3 hero titles or 3 hero SKUs that are absolutely deserving of going to retail, and that's going to be our next focus.

[Nazibur Rahman, analyst]

Once again, congrats on the quarter.

[Adam Levy, executive]

Thanks, Naz.

[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.