NEXGEL, Inc. (NXGL) Earnings Call Transcript & Summary

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to NEXGEL Inc.'s Fourth Quarter and Full Year 2022 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.

Thank you, operator. Good evening, and welcome, everyone, to NEXGEL's Fourth Quarter and Full year 2022 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 reported filings 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.

Thank you, Valter, and thank you, everyone, for joining us today to discuss our fourth quarter and full year 2022 financial and operating results. 2022, our first full year as a public company, was a transformative year for NEXGEL. We successfully executed a multipronged business strategy and grew steadily year-over-year, confirming the vast potential of our proprietary hydrogel platform. In 2022, we achieved record revenues in excess of $2 million, a 32% year-over-year increase, mostly driven by revenue growth in contract manufacturing of 34.7% and branded consumer products of 66.9%. For the full year, we reported a gross profit margin of 12.5%. Throughout the year, our team did a nice job of continuing to refine our processes and manage our costs appropriately. As we expect sales to continue to grow year-over-year for the foreseeable future, the increased revenues will, along with larger production runs, absorb more of the fixed facility expenses, improving our margins even further. For the fourth quarter, we generated revenues of $524,000, essentially flat to the fourth quarter of 2021 results of $533,000. Sequentially, revenues decreased from the third quarter of 2022 by $43,000. This reflects an overall sales slowdown we saw within the Amazon marketplace during the quarter, which impacted our branded consumer product sales and overall sales mix. Our established product had a 29% decline in sales year-over-year, but actually improved in ranking, indicating that the decrease in sales was due to overall softness in Amazon and not lost market share. Amazon sales have since rebounded nicely in Q1, so we believe this was a temporary condition. We also experienced some supply chain delays that impacted new product launches originally scheduled for Q3. The launches came online very late in Q4, but the full impact of the launch -- of these launches not to be felt until late Q1. The higher contribution of lower-margin contract manufacturing revenue also affected our fourth quarter 2022 gross profit margin, which was 7% for the quarter. As we continue to navigate a challenging macroeconomic backdrop, generating record revenue for the full year 2022, speaks volumes at the strength of our business model and strategic direction of the business. Thus far, in Q1, we have seen Amazon sales normalize and new product launches getting off to a great start. Both will allow branded consumer product revenue growth year-over-year to be more in line with the growth we saw in Q3 year-over-year, while shifting our revenue contribution of branded products compared to contract revenue to a more normalized level of about 50% each. Turning to operations and corporate updates. During the fourth quarter, we developed and launched Turfguard, a hydrogel dressing design so turf burn and protect athletic wounds. Turfguard is a unique product that includes sterile silver, and has been approved by the FDA for use of turf -- on turf burn. These patches have been shown to kill 99% of staph, MRSA and Strep bacteria, making Turfguard an effective solution for athletes who are a risk group prone to skin infections. Turf burn is a common skin injury that occurs when athletes come into contact with artificial turf. We have seen our product perform and resonate well with our customers. In fact, we are proud to partner with Greg, The Beast, Gurenlian, a former Major League Lacrosse player to help expand Turfguard's reach and get it into the hands of athletes. Greg as well as other key influencers in various sports are one of NEXGEL's approaches to support the growth of our consumer branded product vertical at an efficient cost. As I mentioned earlier and in prior quarters, we will continue to opportunistically invest Subsequent to the end of the fourth quarter, we acquired a 50% interest in a joint venture with CG Laboratories to create CG Converting and Packaging, LLC. As part of this transaction, we are contributing a cash investment to the joint venture for the purchase of new equipment and facility upgrades as well as general corporate purposes within the joint venture. CG Labs Converting and Packaging division is already a successful and profitable business and has been one of our largest customers for the past 15 years at NEXGEL. This transaction immediately increases our capacity, improves margins and streamlines our supply chain. There are also significant synergies between the 2 operations, allowing for the onboarding of potential finished good customers that in the past were not large enough to be practical for CG Labs, or might be too large for us to onboard alone, as well as combined marketing and customer outreach. We closed the transaction at the beginning of March, and we expect it to be accretive to earnings by the second quarter of 2023. In more recent news, we signed a services agreement with GlaxoSmithKline's Consumer Healthcare division, Haleon. After extensive dialogue and testing of our hydrogel, we are very excited about this opportunity to work with the company of the size and stature of Haleon. As part of the agreement, we will supply them with material for a tentatively scheduled product launch in 2024. We have now developed a strong foundation that will enable our company to execute on its strategies to grow our contract manufacturing, branded products, white label and medical devices business segments year-over-year in 2023 and beyond. With that, I would like to turn the call over to our CFO, Adam Drapczuk.

Thank you, Adam. Today, I'll review financial highlights of our fourth quarter and full year 2022 results. For the fourth quarter of 2022, as Adam mentioned, revenue was $524,000 compared to $533,000 in the fourth quarter of 2021. This reflected lower branded consumer product sales due to the issues that Amazon noted earlier, and from supply chain issues that pushed new product launches originally scheduled for early Q4 into late Q4 and early Q1. Those products were fully launched in Q1, and we expect another 4 products to come online between Q2 and Q3, which should drive branded product sales throughout the remainder of 2023. In 2023, to date, we have seen our sales mix return to more normalized levels. As a result, we expect the mix of contract manufacturing revenue and branded product revenue to be closer to 50-50 whereas during the fourth quarter of 2022, branded product revenue was 37% versus 57% for contract manufacturing revenue. Full year 2022 revenues increased by $497,000 or 32% to $2.05 million compared to $1.55 million for the full year 2021. The increase in overall revenues was primarily due to sales growth in both contract manufacturing and branded products of 34.7% and 66.9%, respectively. Gross profit for the fourth quarter of 2022 was $37,000 compared to $103,000 for the same period in 2021. Gross profit margin for the fourth quarter of 2022 was 7%, reflecting a higher percentage of lower-margin contract manufacturing revenue during the quarter. Gross profit was $256,000 for the year ended December 31, 2022, compared to $8,000 for the year ended December 31, 2021. This is over a 3,100% increase in gross profit from the prior year. The year-over-year increase was primarily due to the increase in revenues from higher-margin branded products and R&D revenue. Gross profit margin was approximately 12.5% for the year ended December 31, 2022, compared to 0.5% for the year ended December 31, 2021. The company anticipates continued improvement in gross margins due to both increased revenue against fixed facility expenses and larger production runs on commercially proven products. Cost of revenues was $488,000 for the quarter ended December 31, 2022, an increase of $58,000 compared to $430,000 for the quarter ended December 31, 2021. The increase in cost of revenues was attributable to the company's revenue growth. Cost of revenues increased by $248,000 or 16.1% to $1.8 million for the year ended December 31, 2022, as compared to $1.5 million for the year ended December 31, 2021. The increase in cost of revenues reflects the company's year-over-year revenue growth. Total operating expenses, including R&D and SG&A expenses, increased to $3.6 million for the year ended December 31, 2022, as compared to $2.6 million for the prior year. The increase was primarily attributable to an increase in franchise tax, increased research and development investment related to the initiation of 2 proof-of-concept studies for drug delivery candidates utilizing our hydrogel technology and the cost of professional fees and other administrative expenses associated with public company governance requirements. The exceptionally high franchise tax was due to the company's IPO and the associated increase in gross assets. As mentioned during our third quarter earnings call, we took corrective action in August 2022 to lower the authorized shares. This will result in substantially lower franchise taxes in 2023, which we now estimate will be $24,000. Research and development expenses increased by $366,000 to $367,000 for the year ended December 31, 2022, from $31,000 for the year ended December 31, 2021. The increase is due to the 2 proof-of-concept studies I mentioned earlier. Net loss for the year ended December 31, 2022, was $4.75 million as compared to $4.31 million for the same period the prior year. Interest expense totaled $1.33 million for the full year ended December 31, 2022, as compared to $1.93 million for the full year of 2021. In 2022, we paid off all of our convertible debt, which makes up the majority of this interest expense. And as a result, our interest expense will dramatically decrease in 2023. As of December 31, 2022, NEXGEL had $6.6 million of cash and cash equivalents and marketable securities, which includes an investment in treasuries of $5.5 million. As of December 31, 2022, NEXGEL had 5,572,234 shares of common stock outstanding. I would now like to open the call for questions. Operator?

[Operator Instructions] Our first question comes from the line of Naz Rahman with Maxim Group.

Congrats on the full year. I had a few. I just want to start on your margins. Like, I understand why the quarter-over-quarter sales slowed down due to the slowdown in Amazon, but it looks like the consumer branded sales, as a percentage of your total sales, only declined about 4% quarter-over-quarter, but the gross margins, the delta was almost like 20% from 3Q to 4 [indiscernible] decline. Can you just kind of give more color on why that is?

So we got to really dig into that because you're talking about smaller size numbers compared to aberrations that could occur. So some of the contract manufacturing margins are different for different product types. So I would imagine it was that as well as the reduction in the Amazon. So Amazon has now become a very high-margin business for us, much more so than it was, for example, in the first and second quarter. We've been able to optimize our advertising spend there to where we're approaching 74%, 75% margin now on our Hero Amazon products. So whereas in the first quarter, that decline might not have produced such a dramatic change in the margin now in quarters 3 and 4, it will because those are the most profitable margin-wise aspects of our business. Does that make sense?

Yes. That makes sense. You also mentioned that you expect your revenue for 2023 to be 50-50 between like the branded products and the contract manufacturing. What kind of gives you confidence in that 50-50? Or how much visibility do you have at this point on that 50-50 number?

So I actually think that number is more addressing the mix in Q1 and perhaps the first half of Q2. I think it's actually going to get even better than that as we move into Q3 and Q4 with the release of new products, higher-margin products, Amblyopia, a whole slew of things that I think is going to move us well past the growth rates that are attainable in contract manufacturing. So I think that 50-50, which is what we had in the third quarter is probably going to be pretty accurate for Q1, and probably the first half of Q2. But then you're going to see it get even better than 50-50, probably 60-40 or so, as we move into later quarters of the year. And we're very confident in that because we see our product release schedule.

Got it. I want to talk a little bit about the Haleon agreement, the supply agreement you signed very recently. Could you sort of just give more color on, I guess, the market opportunities of the product, what potential area the product to be used in? And also, is there an opportunity to develop or -- I guess, develop or launch additional products through this partnership in the future?

So the -- I'm going to try -- I'll work backwards. So the last part is there's always a possibility. We have a very good relationship with the team there. They've been fantastic to us, and they've been wonderful to work with. But we don't know that for sure. Like we have some early stage discussions, but that's well off into the distance. And I wouldn't want to comment on that. We've been working on Haleon, and in previous calls, I had always alluded to trying to land the bigger fish. They first approached us in January of '22. So you know the onboarding process for a company of that size to even get to this point is long, the audits are difficult. The testing is pretty intense. This represents a really, really huge opportunity for us, but I caution that it's a consumer product. So the long-term results and effects on the company are going to depend on the success of the product. You will see very nice increase in revenues just from their first initial order and their first year projections, whenever that comes. But whether or not that sustained and transformative for our business will, of course, depend on whether or not the product is a commercial success. And as you know, if you put out consumer products, that's never a given. So we're really excited to work with them. We think it's an even bigger deal that of all the companies, a company the size of Haleon could have used for this product, they selected us, the tiny company. So it speaks volumes to our platform. We're very proud of that. But the ultimate, what it means to us financially is going to depend on the success of the product. So...

Right. And as far as the actual commercialization of this product, is Haleon responsible for all the commercialization costs and you guys are just strictly responsible for the supply cost? I just want to talk about that.

Well, so they're actually purchasing the supply from us. It's their product.

Got it. And I'm assuming your recent joint venture you did with CG Labs, was somewhat of a product that are -- to some extent, impacted your ability to do the Haleon supply agreement. And going forward in the future, now that you've signed the CG labs JV, could we expect to see more partnerships or agreements similar to Haleon? Or do you think the range will vary? Or what kind of size agreements you think you see in the future?

Well, so I can't speak for Haleon. I'm hoping that they'll want to do more projects with us and work with us, but there's nothing on the table right now. Let's get through the first one and make them happy and show them we can deliver, and then we'll go from there and then that's great. But clearly, an order of the size of even Haleon's initial order would be beyond our capacity to fill in terms of converting and packaging. And I've talked about that on numerous calls before, that, look, we don't have a bottleneck for making gel. We have huge capacity and are using very little of our capacity to make gel. But our converting and packaging operation prior to the CG deal was too manual, too expensive, and we could not handle large orders of this size. So we're hoping that Haleon is the first of many larger customers. But -- yes, that's a big reason why we did the deal with CG, is so that we can service customers and orders of that size because that's where -- and again, we've talked about many times for the last year, white label and custom, and that's kind of what this is, is where we see the biggest potential for growth. And if we want to see that as the biggest potential for growth we need to be able to handle and produce and execute on those orders and orders of that size. Additionally, even orders the size of the current success we're having with SILVERSEAL and with TURFGUARD, we're not converting and packaging those products anymore at NEXGEL. We were using a third-party outside contractor for that. But as soon as the equipment upgrades are done at CG, we'll be flowing all that business through them as well. So the CG deal allows us to do a lot of things and collect additional margin even on products already outsourcing because they're too big for us as they stand now.

Got it. I just want to talk a little bit about your Amblyopia launch, since in our view, it's one of your largest upcoming launches. Could you kind of walk us through what your promotional and launch plans for the product are?

So we are very fortunate to have Dr. Leonard Nelson, who is the editor of the Journal of Pediatric Ophthalmology as well as the Director of the Wills Institute, to really kind of be to help, the co-developer and the spokesperson for this. So the first initial foray out of the public is actually occurring this week on Thursday and Friday and Saturday at the conference, the APOS conference at the Marriott Marquis in New York, and going to be meeting lots and lots of pediatric ophthalmologists who have practices. Our model is to show them what Dr. Nelson, and we believe is a superior product, allows them to sell and offer that product to their patients, so they become our distribution channel. And we think that, that is a way that we can actually -- unlike some of the other medical devices where there's a lot of competition in a difficult supply chain, we believe we can have some really nice market penetration by using that model in this particular instance.

Got it. And just also on the launch, you know it's a different type of product than your MEDAGEL services line. Could you kind of talk about what kind of metrics you'd be looking at to sort of evaluate the launch and its progression?

So to understand the question, you want to understand the launch of the Amblyopia patch, how we would evaluate that?

How you would evaluate. Yes.

The same way you would any other products that we know we're going to be able to get into practices. We already have many practices lined up through introductions made by Dr. Nelson. The real issue is going to be when those practices get the product and they offer to the patients and the patients use it like any other product and they come back and go, "Wow, this was tremendous. My child is not crying anymore. My child's face looks 100% better. We're going to continue to use this." And that's going to create a reorder pattern. And we should see that relatively quickly. I'm talking about 60 to 90 days in the early adopting practices. Once you get that template for success in early adopting practices, then it's just blocking and tackling and rolling it out.

[Operator Instructions] There are no further questions in the call. This does conclude today's conference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.