Nexgel Inc

NASDAQ:NXGL

Earnings Call Analysis

NEXGEL Reports Record Growth and Positive Outlook for Q4 2024

In Q3 2024, NEXGEL achieved revenue of $2.94 million, up 141% year-over-year, with gross profit margins rising to 43.6%. The Silly George brand significantly boosted revenues, now projected at a $5 million run rate by year-end. Contract manufacturing also surged, doubling in revenue to $864,000 after facility expansion. Looking ahead, Q4 revenue is expected to exceed $3 million, bolstered by new product launches and partnerships, notably with Cintas and AbbVie, set to enhance visibility and sales in 2025. The company aims for positive cash flow by Q4 2024, reflecting its strategic growth and operational improvements.

Record Financial Performance

In the third quarter of 2024, NEXGEL reported a remarkable revenue of $2.94 million, marking an impressive increase of 141% year-over-year and 104% compared to the previous quarter. This surge is largely attributed to the strong performance of the company's branded consumer products and contract manufacturing segments. Gross profit margins soared to 43.6%, a significant improvement from 28.2% in the same quarter the prior year and 28.5% in the preceding quarter. These developments suggest the company is effectively scaling its operations and enhancing profitability.

Branded Consumer Products Drive Growth

The company highlighted that its branded consumer products division experienced a sequential revenue increase of 99%, while contract manufacturing grew by approximately 103%. An important contributor to this growth has been the Silly George brand, which has seen its revenue run rate triple from approximately $2 million to $5 million since its acquisition just six months ago. This brand focuses on beauty and cosmetics, including products like eyeliner and lashes, and has been successfully launched on Amazon, indicating a solid market presence and consumer interest.

Expansion in Manufacturing Capabilities

NEXGEL recently completed a significant expansion of its Texas facility aimed at accommodating new client relationships and increased production demands. The plant's square footage was doubled, supplemented with state-of-the-art automated machinery. As a result, contract manufacturing revenues normalized to $864,000 in Q3, a notable increase from $425,000 in Q2 2024. This enhancement not only bolsters NEXGEL's manufacturing capacity but also positions the company well to capture future growth opportunities in this segment.

Strategic Partnerships and Product Launches

The company has been actively forming strategic partnerships to enhance market reach. Notably, an agreement with Cintas Corporation will see the distribution of NEXGEL's flagship product, Silverseal, across numerous businesses in North America. Additionally, the successful launch of HistaSolve, an enzyme supplement, could potentially tap into a market generating over $20 million in annual revenues. These developments signify NEXGEL's commitment to expanding its product offerings and cementing its foothold in various markets.

Guidance and Future Prospects

Looking ahead, NEXGEL expects revenue in Q4 2024 to exceed $3 million, continuing its growth trajectory. The company is on the cusp of achieving positive cash flow, with expectations of improved cash flow operations as it approaches this milestone. Furthermore, the anticipated revenue contribution from the partnership with AbbVie in 2025 sets the stage for even greater growth opportunities. Overall, momentum appears strong as the company gears up for holiday sales, particularly for its Silly George products, with historical data indicating November as a key sales month.

Financial Health and Recent Fundraising

As of the end of the third quarter, NEXGEL reported a cash balance of approximately $1.1 million. The company successfully completed a $2 million financing round shortly thereafter, primarily aimed at bolstering working capital to meet increased inventory demands and marketing efforts, particularly for the Silly George brand. This cash infusion highlights investor confidence, especially as insiders participated, which often signals an optimistic outlook on the company's prospects.

Challenges and Margin Outlook

Despite the encouraging increase in gross margins, management acknowledged that costs associated with sales and marketing have risen significantly, impacting overall profitability. As operations scale, future gross margin improvements are expected, particularly in contract manufacturing, which is forecasted to achieve margins between 35% and 45% in Texas, and 40% to 50% in Langhorne. As production volumes rise and capacity utilization improves, the company anticipates a reduction in EBITDA losses, setting a more favorable financial landscape moving into 2025.

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon, ladies and gentlemen. Welcome to NextGel's Third Quarter 2024 Earnings Conference Call. [Operator Instructions] And just a reminder, today's call is being recorded. [Operator Instructions] Now at this time, I'll turn things over to Maria Holcutt, Account Director of KCSA Strategic Communications introductions. Maria, please go ahead.

[Unknown Attendee]

Thank you, operator. Good afternoon, and welcome, everyone, to NEXGEL's Third Quarter 2020 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. Also, during the course of today's call, we will refer to certain non-GAAP financial measures. Reconciliation of the non-GAAP to 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.

[Adam Levy, executive]

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, bake eyelashes, lash growth serum and Mascara. As a reminder, when we acquired the brand 6 months ago in May, Silly George was on a revenue run rate of approximately $2 million.

Since then, we have launched new products introduce 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 Kenkoderm and [ MetaGel ] 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 STADA continues to progress well. We recently announced the release of our first product, [ HistaSolve, ] which is sold as [ Daosin ] in Europe. This is Europe's #1 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, Silverseal. [ Cintas ] will distribute Silverseal 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 Silver Seal's brand awareness. The first orders of Silver Seal 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 [indiscernible] a leading global supplier of safety products and personal protective equipment for medical, surgical and aesthetic health care facilities.

Laser hair removal has proven to be effective and permanently removing hair. However, it can be associated with the release of a [ Ploom ] that contains airborne particles and hazardous organic compounds, which is 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 of enacted legislation mandating the use of [ Ploom ] evacuation systems in order to mitigate the hazards and risks of exposure to the [ Ploom. ] Our high water content hydrogel potentially may offer a long-needed industry-wide solution for absorbing and capturing [ ploom ] 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 Vanilla, we have initiated a human trial being conducted at the Florida Clinical Research Center by plastic surgeons.

Our hydrogen will be applied to 30 patients prior to laser hair removal treatments with the primary outcome measure being the reduction of Ploom 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 Cracker to our Scientific Advisory Board, who brings over 2 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 role, Mr. [indiscernible] 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 pads that will not lead to 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 sonic 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.

Lastly, 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 6-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 Drapczuk. Adam?

[Adam Drapczuk, executive]

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% and 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 Kinko Derm were acquired after the comparable 2023 period. General selling, general and administrative expenses increased by $1.2 million or approximately 118% to $2.07 million for the third quarter 2020 and as compared to $950,000 for the third quarter 2023.

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 2024 was $754,000 and as compared to a net loss of $552,000 for the third quarter 2023 and a net loss of $979,000 for the second quarter 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 Silly George brand products.

As of November 13, 2024, NEXGEL had 6,790,777 shares of common stock outstanding, which number does not include the $772,000 shares of common stock we anticipate issuing in connection with our recent offering. I would now like to open the call for questions. Operator?

[Operator]

[Operator Instructions] We'll go first this afternoon to Naz Rahman of Maxim Group. Naples.

[Nazibur Rahman, analyst]

Congrats on the call. I just have a few First to start at a high level. Your next is very close to turning cash flow positive. I guess, strategically, what are you sort of thinking about in terms of what happens in nutshell, what do you do next when you become cash flow positive? Like what initiatives could you engaging or what projects you take on once you sort of make that churn?

[Adam Levy, executive]

Well, it's good to hear from you again. That churn is always important. And I've said this before that 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 what those will be exactly, we've always been opportunistic.

So 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.

[Nazibur Rahman, analyst]

Got it. That was helpful. On the laser 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 -- I guess, what are the regulatory steps following the study readout? And what do you think would be the time line to have your hydrogen incorporated into that procedure commercially?

[Adam Levy, executive]

So the study is really primarily -- it's -- there's no real regulatory requirement for it. The study is really to show that it suppresses the ploom and to allow us to commercialize, right? So we'll be able to make claims about suppressing the Ploom. 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 together and we announce it later on this quarter.

[Nazibur Rahman, analyst]

In that study?

[Adam Levy, executive]

Sorry. No, no. That study is being funded by [indiscernible] 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.

[Nazibur Rahman, analyst]

Got it. And I guess just one last question. So we're obviously approaching the holiday season. And typically, your products tend to get a boost during the holiday season. And I know [indiscernible] 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, at least for what products

[Adam Levy, executive]

Yes. So by the way, I 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, 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.

[Nazibur Rahman, analyst]

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

[Adam Levy, executive]

Sure. So we do have some partners in Europe now. They're interested in taking the products in. I think you'll start to see some European deals come to fruition in the first half of 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, they only do the planograms once a year.

When these planograms come due, we will be selected in there, 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 Silver Seal up in Canada, both on Amazon and at retail.

[Eric Ramos, analyst]

Got it. Once again, congrats on the progress.

[Operator]

[Operator Instructions] We go next now to Michael [ Gustitis ] at One Pride. Adam, congratulations on another record quarter. I was going to ask a question about the retail, but 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 projects with the next rate. I was wondering if you could, had any potential numbers, any ballpark numbers for what those would look like.

[Adam Levy, executive]

Yes. So as far as the next rate goes, we brought Kip on to really push that program forward. He's had some very interesting ideas for the use of our adhesive in other drags that could actually be simpler and market. 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.

[Unknown Analyst]

Okay. Congratulations again.

[Operator]

We'll go next now to George Marima at Peripo Adventures.

[Unknown Analyst]

Thanks, Adam. Real nice improvement on the gross margins. If you look out to 25 from kind of a high-level view, as your volumes increase, I know there's a difference with the volumes in different businesses and then the product mix. But just on a broad spectrum, as your volumes go up in 2 how will gross margin move when you have higher capacity and utilization rates and such, will that look?

[Adam Levy, executive]

Yes. 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 I want to stay true. That -- those are the gross margins. But remember, it's skewed by the explosion in Philly, 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&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 85% to 87% gross margin because everything is below the line.

[Unknown Analyst]

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 facility is paid for. So where you really see a larger effect in reducing our losses in terms of cash flow will be in Q4 and Q1 when Cintas and AbbVie come on board. Does that make sense?

[Adam Levy, executive]

Yes. Yes. No, that's exactly what I was trying to get into is the contract manufacturing side. So can you -- I'm going to push you a little harder.

[Unknown Analyst]

So in '25, just a contract manufacturing part, where can gross margins sort of go.

[Adam Levy, executive]

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 contracts manufacturing margins if you are adding people and have to cover the facility costs. But since we were 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.

[Unknown Analyst]

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 out for next year?

[Adam Levy, executive]

Well, they distribute to over 1 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 our second largest or largest customer and again, as I said, the other real benefit is going to be -- I'm very excited that people will see silver seal 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, that's a product you'll know. So both of those things, we think, can be very valuable to us.

[Unknown Analyst]

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

[Adam Levy, executive]

Yes, I'm just going 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.

[Operator]

[Operator Instructions] Just final reminder, ladies and gentlemen, and we'll pause for just 1 moment. And Mr. Levy, it appears we have no further questions this afternoon. Sir, I'd like to turn things back to you for any closing comments.

[Adam Levy, executive]

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 NEXGEL's Third Quarter 2024 Earnings Conference Call. Again, thanks so much for joining us, everyone, and we wish you all a great evening. Goodbye.