Nexgel Inc

NASDAQ:NXGL

Earnings Call Analysis

NEXGEL Boasts Transformational 2023 with Solid Growth Outlook

In a landmark year, NEXGEL achieved nearly 100% year-over-year revenue growth, reaching approximately $4.1 million, fueled by gains in contract manufacturing and branded products. Expanding its footprint, the company fortified key partnerships, anticipating substantial growth. Gross margins improved from 12.5% in 2022 to 15.1% in 2023, setting the stage for expansion, particularly into the European medical device market upon achieving MDR compliance. A notable partnership with AbbVie spotlights NEXGEL's exclusive hydrogel technology for a cellulite treatment device with a launch targeted by end-2024. Additionally, an alliance with STADA to distribute consumer health products in North America, and the acquisition of Kenkoderm enhance the company's wellness portfolio. The year ended with a strong cash position of $2.7 million, with Q1 revenue projected at $1.25 million, indicating continued positive momentum.

A Transformational and Record-Breaking Year

NEXGEL experienced a groundbreaking year in 2023, with substantial advancements in its operational capabilities and strategic alliances that herald considerable growth. The company celebrated nearly doubling its annual revenue to about $4.1 million, a near 100% increase compared to the previous year.

Seasonal Patterns and Fourth Quarter Dynamics

The fourth quarter saw a minor sequential dip in revenue, a pattern NEXGEL attributes to typical seasonal variations in its contract manufacturing and consumer business. Historically, sales in branded products begin to rise in February and hit their peak in the third quarter.

Branded Product Growth and Market Expansion

NEXGEL's branded products proved to be a significant driver of growth, with annual revenue climbing by 52.4% to $1.24 million. The fourth quarter alone saw an impressive year-over-year increase of 104.2% in branded product revenue, reaching $392,000.

Gaining Margin and Preparing for European Market Entry

The company's gross margins improved from 12.5% in 2022 to 15.1% in 2023. NEXGEL is preparing to enter the European market pending compliance with European medical regulations (MDR), a process expected to incur additional costs of approximately $150,000 in the first half of the year.

Strategic Investment in Efficiency and Capacity Expansion

NEXGEL forecasts a stable profit margin between 20% to 25% from direct-to-consumer branded products. The company is aiming to improve margins across the board by investing in automation and facility expansion, setting the stage for increased operational capacity and efficiency.

Strengthening Ties with AbbVie and Preparing for a Major Launch

One of NEXGEL's key strategic agreements includes being an exclusive supplier for AbbVie's Resonic Rapid Acoustic pulse device, enhancing cellulite appearance. Despite initial expectations for a mid-2024 launch, the timeline has been adjusted to the end of 2024. Meanwhile, a nonrefundable deposit of $176,000 from AbbVie underscores the solid partnership, although this figure is not included in current revenue calculations.

Acquisition, Cash Position, and Q1 Revenue Expectations

With the acquisition of Kenkoderm, NEXGEL anticipates additional revenue streams. Ending Q4 with $2.7 million in cash, the company projects revenues of $1.25 million for Q1, coming from Kenkoderm's full quarter of operations. The revenue projection excludes the AbbVie deposit, which is recorded as a deposit on the balance sheet.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning. My name is Todd, and I will be your conference operator today. At this time, I would like to welcome everyone to NEXGEL's Fourth Quarter and Full Year 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]

Thank you, operator. Good morning, and welcome, everyone, to NEXGEL's Fourth Quarter and Full Year 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 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 morning 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 fourth quarter and full year 2023 financial and operating results. 2023 was a record year for NEXGEL and transformational in many respects. Over the course of the year and into our current first quarter, we have significantly expanded our operational infrastructure, solidified several key strategic partnerships with multi-billion-dollar corporations and made key strategic investments, that collectively have our company prepared for what we believe will be significant growth going forward.

For the full year of 2023, we increased revenue by nearly 100% year-over-year to approximately $4.1 million. This year-over-year growth was driven by an increase in both contract manufacturing and branded products of 166% and 52%, respectively. For the fourth quarter, revenue decreased slightly sequentially mainly due to seasonality in both our contract manufacturing and consumer business. A recurring pattern historically in our branded products has been to see increased sales beginning in February and peaking in Q3.

We, therefore, expected a slight decrease in revenue from Q3 to Q4 and to trend upwards in our current Q1 throughout the remainder of the year, which I will provide more details on shortly. As a reminder, the second quarter of 2023 was our first full quarter of revenue contribution from our joint venture with CG Converting and Packaging in Texas. Segmenting our revenue between contract manufacturing and branded products, in 2023, we are proud to have grown branded product revenue by approximately $427,000 or 52.4% to $1.24 million. For the fourth quarter of 2023, branded products revenue was $392,000, an increase of 104.2% year-over-year and 10.1% sequentially. When you exclude Kenkoderm from branded products, the year-over-year growth in the fourth quarter of 2023 was approximately 45%.

Our hero products, Silverseal, a hospital grade hydrogel dressing for wounds and burns continue to drive consumer demand within the OTC wound care market. Today, we have 29 health and beauty products sold direct to consumer. From the ground up, we have built a line of direct-to-consumer health and wellness products that we expect will continue to grow in the foreseeable future year-over-year with several strategies in place, including expansion into Europe and a retail strategy for North America. For the full year, gross margins were 15.1% compared to 12.5% in 2022.

As I mentioned earlier, in our branded products, we have several growth opportunities to sell into Europe. To do so must be European medical regulation or MDR compliance. Once our facility in operation are fully MDR compliant, we will be able to self-certify all of our Class I medical devices thereby opening up the European market for us. During the fourth quarter of 2023, we had expenses of approximately $153,000 relating to the process of receiving MDR compliance such as the inspections, consulting fees and application fees, which are accounted for in our SG&A. Our final inspection is scheduled for Q2 of this year Therefore, we expect some further MDR compliance cost in Q1 and some in Q2 as well, totaling approximately an additional $150,000.

I would also like to provide insight into how we analyze gross profit margins and where the growth levers are. We look at margins 3 ways at NEXGEL. First, our branded products we currently sell direct-to-consumer carry a fairly stable contribution margin of between 20% and 25%. There are some efficiencies that should occur as we optimize and scale, but we see this as a stable profit for the company in the coming quarters. Secondly, our converting and packaging operations carry a contribution gross margin of approximately 20% to 30% on retail products and 30% to 40% on medical device products.

We will steadily move towards the higher end of this range as new state-of-the-art automation equipment arrived at the facility and comes online. Additionally, as we have mentioned before, we are already in process with our landlord to expand this facility by approximately doubling the square footage to meet the significant increase in demand we expect going forward. The additional space, along with having 3, not 1 automated machine lines will significantly increase our operational efficiency. Lastly, and our biggest growth lever is gel manufacturing in our Pennsylvania facility. While we have grown utilization of this facility as our branded product sales have increased, we are still only operating at approximately 9% to 13% capacity.

Given that our fixed costs will only increase minimally as we increase production to meet the demand on our significant partnership agreements. Once these customers come online and throughput increases, we expect continued improvements in our margins and cash flow. One of these key customers is AbbVie who provides a major growth driver for our company and an important validation of our hydrogel technology. In October of 2023, we executed a supply agreement with AbbVie to be the exclusive supplier of gel pads with a Resonic Rapid Acoustic pulse device, which is to be used for the improvement in the appearance of cellulite. In December of 2021, AbbVie acquired the owner of this technology, Soliton, for $550 million in cash after which Resonic device demonstrated significant improvement in the appearance of cellulite.

After extensive due diligence from AbbVie for many months, our hydrogels were chosen as the exclusive required razor blade to its razor model for each procedure to be done. Our ability to meet the high standards of AbbVie demonstrates the uniqueness of our technology and the fact that a company of their size will select us is something that we are very proud of. Our dialogue with AbbVie to date has been engaging and collaborative as the launch approaches.

We speak weekly to ensure that we, as one of the many suppliers on this launch that it goes off flawlessly. We have said many times that this is AbbVie's launch, not ours. We had targeted mid-2024 for the launch as likely but is now looking more like the end of 2024. In Q1, we received a nonrefundable $176,000 deposit from AbbVie against their first order. While this is a deposit and not reflected in revenue, the additional capital is certainly helpful. In addition to AbbVie, we have several other important growth drivers for 2024.

In December, we announced an important partnership with STADA, a European leader in consumer health to distribute and commercialize a product line of consumer health OTC products in North America. Our investment in MDR compliance will also bode well for this partnership in Europe and in the future as well. The launch of these products is on schedule as planned for mid-summer. Also in December, we acquired Kenkoderm, a privately owned skin care company focused on treating the symptoms of psoriasis. The addition of 6 new SKUs, which include cream, salt soap, mud soap, shampoo, conditioner and a multivitamin perfectly aligned with our health and wellness offering, bringing forth immediate synergies to support optimization of marketing and supply chain operations.

In Q4, we recognized 1 month of revenue for the Kenkoderm product line and our current first quarter will be our first full quarter of revenue. This product line is profitable and will contribute positively to our financial results in Q1. Cash at December 31, 2023, was $2.7 million as compared to $3.27 million at September 30, 2023, reflecting a $546,500 payment in cash for Kenkoderm paid in Q4. Subsequent to the end of the year, we completed a registered direct offering led by insiders of just over $1 million at attractive terms, and we feel very comfortable with our cash runway.

Looking into Q1, we expect revenue of $1.25 million, which reflects the full quarter of revenue from Kenkoderm, but does not include the $176,000 deposit from AbbVie discussed earlier, and that will not be booked yet as revenue, but rather as a deposit. We also expect margins to be in line with that of the fourth quarter or slightly improved. We have a lot to be excited about in 2024. I want to thank our entire team for laying the foundation for growth for the future. 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 fourth quarter full year 2023 results. For the year ended December 31, 2023, revenue totaled $4.1 million, an increase of $2 million or 99.7% as compared to $2 million for the year ended December 31, 2022. The increase in revenue was primarily due to sales growth in contract manufacturing of 166% and branded products 52% year-over-year. For the fourth quarter of 2023, revenue totaled $1.1 million, an increase of approximately 110% as compared to $524,000 in the fourth quarter of 2022.

Gross profit totaled $619,000 for the year ended December 31, 2023, compared to a gross profit of $256,000 for the year ended December 31, 2022. Gross profit margin for 2023 was approximately 15.2% as compared to gross profit margin of 12.5% for 2022. The increase in the gross profit year-over-year directly correlates to our higher sales. Gross profit for the fourth quarter of 2023 was $158,000 compared to $36,000 for the same period in 2022. Gross profit margin for the fourth quarter of 2023 was 14.6%.

Cost of revenues increased by $1.7 million or 93.6% to $3.5 million for the year ended December 31, 2023, as compared to $1.8 million for the year ended December 31, 2022. The increase in cost of revenues pertains to an increase in materials and finished products and equipment, production and other expenses.

These increases primarily align with the increased revenues. Cost of revenues was $924,000 for the quarter ended December 31, 2023, an increase of $436,000 compared to $488,000 for the quarter ended December 31, 2022. The increase in cost of revenues was attributable to the company's revenue growth. Selling, general and administrative expenses increased by $756,000 or 23.4% to $4 million for the year ended December 31, 2023, as compared to $3.2 million for the year ended December 31, 2022.

The increase in selling, general and administrative expenses is primarily attributable to an increase of compensation and benefit expense, advertising, marketing and Amazon fees as well as the cost for professional and consulting fees. Selling, general and administrative expenses totaled $1.4 million in the fourth quarter of 2023 as compared to $778,000 for the same period the prior year.

Research and development expenses decreased by $264,000 to $103,000 for the year ended December 31, 2023, from $367,000 for the year ended December 31, 2022. The decrease is due to the completion of development efforts of 2 proof-of-concept studies for drug delivery candidates utilizing our hydrogel technology.

In 2022, the company paid off approximately $3.5 million in convertible notes reducing interest expense from $1.3 million in 2022 to less than $20,000 as of December 31, 2023. Net loss for the year ended December 31, 2023, was $3.2 million as compared to $4.7 million for the same period the year prior. As Adam mentioned, as of December 31, 2023, the company had $2.7 million in cash and subsequently closed on approximately $1 million registered direct offering led by insiders. As of December 31, 2023, NEXGEL has 5,741,088 shares of common stock outstanding, which increases to 6,227,624 shares of common stock outstanding in Q1.

The Q1 increase is primarily a result of the aforementioned registered direct offering. I would now like to open the call for questions. Operator?

[Operator]

[Operator Instructions]

Our first question will come from Bill Odenthal with Cove Capital.

[Unknown Analyst]

Two questions. One is -- when do you expect to be MDR compliant this year in Europe and actually start selling product overseas.

[Adam Levy, executive]

Yes, I'm sorry, -- can you hear me? Yes. Yes. So Billy, there are several pre-inspections we've already gone through. The final inspection is scheduled in Q2 at the end of May, maybe gets pushed in the first week of June. But at that point, we expect to be MDR compliant, that will allow us to begin to release all of our Class 1 devices and be self-certified.

Some of the Class 3s, like SilverSeal might take a little bit longer. We're targeting the end of the year for clearance on those, but it will start the flow of our products moving out into Europe, and we have a lot of interest from different parties for that market.

[Unknown Analyst]

So tough question, but I'm going to ask it anyhow. When can we expect the company to start having a positive cash flow?

[Adam Levy, executive]

Well, as you know, that's one of our primary motivating objective. I would simply say stay tuned. We've obviously had to spend a little bit of money for some of these like MDR initiatives as well as our expansion, but it is coming, stay tuned.

[Operator]

Our next question comes from Kenneth Sher.

[Unknown Analyst]

My question regarding net working capital. Are you guys confident that you have enough cash runway to fund these orders? I'm assuming and hoping that these are large orders from AbbVie and STADA Health. But just like looking at your balance sheet, it looks like half your cash is already tied up with -- or can be used for accounts payable and whatnot. And I'm assuming that there's some long payment terms with AbbVie. So could you provide some clarity on that?

[Adam Levy, executive]

Yes. Actually, the opposite is true. So when I think about concerns for the cash flow, I think about our move into retail and accounts like these big box retailers, they're the ones that tended to jerk around for cash. Our experience has been with these big multinational so far, and we've now have a relationship with 3 or 4 of them is that they want to pay you in one day because they all have financing arms. And in fact, I can share with you that we've already been offered a very, very early payment on the deposit.

So those companies for a point or two are always anxious to pay you as fast as possible. It is the opposite when we go to retail, but for companies like AbbVie, Medtronic, Owens & Minor, they all have super fast payment terms.

[Unknown Analyst]

Okay. That's wonderful to hear. And then my second question was regarding the Kenkoderm acquisition. Have you guys seen any revenue synergies with that acquisition? Or has it really been accretive?

[Adam Levy, executive]

So it's been accretive in that we bought something that was already profitable. We've been able to improve the margins by optimizing some of the advertising. But the true bonus, so we say, the one plus one equals three of this deal, which is cross-promoting we're waiting for the completion of our new and updated website, which is another infrastructure project we're investing in.

We really, at the start, didn't know how successful our consumer products would be. So if you go on the [indiscernible] website, it's a $7,000 website. We really need to get that updated, and have a good front phase. And then -- and by the way, that project should be completed in early June, and then we'll be launching a lot of these cross synergies. The one synergy we have seen is that as I've gone to Europe and begun discussing NEXGEL products for distribution there, there's also considerable interest for Kenkoderm.

There's also interesting Kenkoderm at certain retailers here in the U.S. So Kenkoderm is another product in my bag. You probably won't see those deals under that revenue until later in the year, but we think those synergies are definitely coming.

[Operator]

[Operator Instructions]

And we'll go ahead and take our next question from Naz Rahman with Maxim Group.

[Nazibur Rahman, analyst]

Congrats on the progress. See now AbbVie is now planning on launching will look to be at the end of 2024. Do you think you might see any considerable preorders of revenue recognition for -- related to the resonic device in 2024? Or do you think that from 2025?

[Adam Levy, executive]

Well, no, we're looking at delivery at the end of 2024 according to the latest that we've gotten from them. So we will see some revenue. But obviously, the first full big quarter of revenue is now looking like Q1. But there will definitely be revenue in preorders in Q4.

[Nazibur Rahman, analyst]

Got it. So last year, you guys launched your amblyopia [indiscernible] over the summer. Now that you've had several months worth of data, could you put some color and metrics on how that launch has gone and if you're seeing any reordering patterns from docs?

[Adam Levy, executive]

So we are seeing -- the short answer is it's going slowly. It is growing. We have seen reorder patterns from the docs that have it. I think I might have talked about this a little bit on the last call, but one of the issues or errors that we made was the assumption that docs would be interested in a profit margin associated with selling in office. That has turned out not to be the case. In fact, most of the docs said, let this be a lot easier if we could just send our patients to Amazon.

As a result, you will be seeing in the next 10 days, the product available on Amazon with the docs able to refer their patients to simply buy it directly from us. This is a, good for margins and b, we think will be a much more efficient method of getting the product out there. So again, the answer is it's been growing but slowly. And we're hoping that this change in distribution method will help speed things up.

[Nazibur Rahman, analyst]

Got it. And as far as you're going into retail, I mean you guys talked about a little bit. When you go into retail, is your product offering just going to include the Silver brand? Or do you also plan including Kenkoderm and also potentially [indiscernible] products?

[Adam Levy, executive]

So that's a great question. The idea at retail is you want to go with your hero products, right? Because retail can be a double-edged sword. If you go to retail with the wrong product or too early on a product, you'll get destroyed, you'll end up paying a fortune to get it in there. It won't sell, you'll get returns, they want to pay you. A lot of the cash flow problems that Ken was worried about will begin to occur.

So in the beginning, we're going to limit it to Kenkoderm certainly has the ability to go in there. It should be a very good product for retail because it is focused and specialized and has strong Amazon sales, SilverSeal for sure, hexogels, those are the types of products we'll start with, and then we'll see from there.

[Nazibur Rahman, analyst]

Got it. And my last question is, could you potentially give an update on the status of the 510(k) medical devices [indiscernible], where you put those in development? What are your plans for that in 2024.

[Adam Levy, executive]

Sure. So we've kind of pushed those a little bit on hold only because there are so many things we can do and the equipment necessary for the extrusion process on there, while we now have identified what it is we need our first priority is for a mechanization that will allow us to deliver all the AbbVie products and STADA products, et cetera. So that's been kind of a shift, but we're also still running experiments on sterilization protocols and interestingly enough, it seems like there's another opportunity for us with a cataract surgical drape.

So we're still experimenting. We're still developing the product, but it's really kind of #5 in our list of priorities right now just because there's so much for us to do.

[Operator]

[Operator Instructions] We have no questions in the queue at this time. This will conclude today's NEXGEL Fourth Quarter and Full Year 2023 Earnings Conference Call. You may disconnect your line at this time, and have a wonderful day.