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

Welcome to Breakout Investors. We are excited to be speaking with the management of NEXGEL, ticker NXGL, specifically the company's CEO, Adam Levy. Joining me on today's call and leading Q&A are Breakout Investors' Sam McColgan. This call is being recorded on February 20, 2025, and will be distributed via the Breakout Investor YouTube channel and our Substack network. Supporting materials and post-call analysis will be posted on the Breakout Investors collaboration app available on the app stores and at breakoutinvestors.com. The application and much of the research content is free. We also invite you to join our WhatsApp community, which is linked to in our YouTube profile. So let's get the call started with me handing it over to Adam for a brief presentation followed by Q&A led by Sam. Adam?

Thank you, Josh, and thanks, everybody, for joining. At NEXGEL we've spent 2 decades, before I became CEO, creating custom hydrogel solutions for large medical device companies. The core technology is that we use an electron beam accelerator to make solid cured hydrogels. There are solid hydrogels that can be made in other manners, such as UV light and chemical, but chemical cross-linking, and those are typically the gels that are manufactured in China and in Europe, have their downfalls. Those chemicals are invariably skin irritants and/or carcinogens, and that makes them unsuitable for a wide variety of applications that we are going to address. And I'll go through those in a little more detail as we go through the deck. As you can see, we've done deals and now have relationships and strategic partnerships with some very large companies. These were all sort of started in the last 2 years, STADA, Cintas, AbbVie, Owens & Minor, and we'll talk about those in a little more detail as we go through it. When I got to the company in 2019, it was very small. It was doing about $600,000, maybe, in total revenues. And I wanted to grow the business and looked at three potential opportunities. These are the three segments that we focus on. The first was medical device. We've been making components of other people's medical devices for a long period of time, but we didn't have our own. So we started with the drape, surgical incise drape, using and applying our technology to make our own -- and we'll get into the different medical devices. The second, which I thought was the lowest-hanging fruit, was custom and white label. And by that, I mean finding -- I did not want to go into branded, by the way. Branded was going to be the last thing because branded is very fickle. It's difficult, it's expensive to build. That was going to come once we proved ourselves in custom and white label. Custom and white label, imagine a company with a successful lotion, a cream, a gel for some indication -- acne, eczema, whatever it might be -- and we could now give them a patch, because we're non-skin irritating, we don't have the problems that acrylic adhesive has, we're not painful to remove from the skin. So we thought that this was our lowest-hanging fruit, and it turned out it was, just the pandemic kind of changed our plans a little bit. So a little bit about our facilities. In Langhorne, Pennsylvania, we have where we make the hydrogel. It is a 16,500 square foot facility. It is ISO certified, FDA registered and CGMP. So we manufacture all of the medical grade hydrogels there. One of the constraints that we had was this particular facility only has a small white room. We started out making products in much smaller quantities when it was a small business for finished goods. And eventually, when we started to land some of these larger customers, we recognized that we would not be able to handle those orders. As a result, about a year and change ago now, coming up on 2 years, we did a deal with CG Converting and Packaging. They were one of our larger customers, they were very adept at converting and packaging the hydrogels. So we have a 50-50 partnership with them now. We just built a new facility in Granbury, Texas. We have a 6,000 square-foot clean room in that facility, brand-new equipment, [indiscernible], [ Mac Teks ]. So we can now fulfill these larger orders from these larger customers that are coming online fourth quarter of last year, first quarter of this year and beyond. So what makes this hydrogel different? There are only two facilities in the world that make E-beam hydrogels. We own one, Medtronic owns the other. Medtronic, however, does not compete with us. They do not do contract manufacturing. They only make one kind of gel. They dominate; they make 2.4 million pounds of blue gel a year. And in fact, Medtronic is one of our customers. So they actually have some smaller runs. They're not a big customer of ours, a couple of hundred thousand dollars a year in sales, but we actually make two different gels to support two of their medical devices because they don't want to come offline on their gels. What makes these gels special as they are biocompatible, we can get very high water content. The chemical hydrogels can maybe get to 50%, maybe 55%, we can get to 95% water. So we can essentially make sheets of water. We have delivered over 200 different types of additives. We can make them sticky, non-sticky, thicker, thinner, it's all customizable and there are numerous applications for this technology. So first, let's talk about the medical device pipeline. I refer to this as our aspirational programs. Why do I say that? I say that because we think there's great value to be unlocked here. But these are all in areas that we are not going to try to compete and/or market in. So when you talk about the surgical drape market, you talk about drug delivery, you're either talking about an enormous amount of capital investment and/or a sales force going up against the likes of 3M, Avery Dennison, Owens & Minor. We're taking a different approach. And our approach is we come up with a novel idea. We do proof-of-concept studies and then we look to partner and/or sell and/or spin out those technologies. So the first thing that we did, and we announced this, was we did a diclofenac patch. We showed a very, very effective delivery of diclofenac. This was just a proof-of-concept study to show how well we can deliver materials through our adhesive patches. The program we're most excited about working on right now is our aremilast patch. Some of you may notice that Dr. Jerry Zeldis, who is the Chief Medical Officer of Celgene, is on our Board of Directors. Dr. Zeldis had an idea, having been one of the developers of apremilast, that if you're on a premelast and/or a biologic like SKYRIZI, you generally get very good results, 80% to 90% clear-up of your psoriasis lesions. However, what about the stubborn 10% to 20% that still remain? His thought was that we could put a patch on and deliver the apremilast directly to the lesion, that we could get greater efficacy. So we did delivery studies. We found that we can deliver 4x or 5x the dose for tissue retention as the oral but in a very focused way. And we've done our first 10 patients, and it seems very promising in Canada, we're going to be doing 10 more as we build out the protocol. We would not be interested in trying to replace the oral. This is an adjunct therapy, which we think makes it more attractive in that it increases the size of the market as opposed to being cannibalistic. Additionally, if you have mild to moderate, you may not qualify for oral apremilast or oral SKYRIZI. So this could also be an additional audience of mild-to-moderate sufferers. Again, these are the sorts of things that we are going to develop and then look to partner. Our surgical drape is another project that's been going on for some time. The surgical drape we have is very general to the skin. Skin tears and the removal of epidermis post surgery is obviously counterintuitive to preventing infection. So this is a side-by-side of a cadaver study using our drape on the right, the same exact cadaver and the IO-band on the left, you can see the IO-band caused some skin tears and a lot of paleness and the removal of skin, whereas our skin looks rich, healthy, moisturized, and the drapes performed similarly up until removal. And this is different and especially pertinent to an elder crowd with fragile or crepey skin. So those projects are moving down the pipeline. We don't spend a lot of money on them, they're not part of our calculus for getting cash flow positive, which remains one of our highest goals. It is just out there because we think there's great value potentially there, and it's worth developing a little bit. So moving over to our consumer product side, as I mentioned, we were going after custom and white label first. That still remains our biggest area that we think. However, when the pandemic hit in 2020 -- remember, I became CEO at the end of 2019 -- that sort of business that we'd gotten a great response to kind of dried up. And at the end of 2020, we're sitting around, we were private then, we got a little PPP and EIDL money, and the thought was: what do we do now? Well, let's just put some things on Amazon and see what happens. That has grown into a $7 million a year business for us right now, maybe closer to $8 million. And we continue to buy brands, build brands, and we do a very, very good job marketing as it turns out. So the key to our -- we also bought two brands. So we bought a brand called Kenkoderm. We bought that about a year ago, almost exactly to the day, in December of last year, the year before last. Kenkoderm has done very, very well as a line for psoriasis. We've grown the product by about 20% in the year that we've had it. And now we'll be releasing other indications like eczema and rosacea in the second half of 2025. In May, we bought a product line called Silly George. It was a beauty and cosmetics company, but really it was a eyelash company focused on eyelashes. And the deal that we did with Silly George is typical of our roll-up strategy, it's kind of what we look for if you want to get an idea of what we do look for. It was on an annual run rate of $2 million a year. It was throwing off about 10% contribution margins, so $200,000. We bought the company for $400,000 in cash from $200,000 in stock, so $600,000 total. We thought we could get that margin, by the way we could market it, we found some -- I thought we could get it to at least 15%. So it was either going to be a 3-year payback with cash back in 2 years, or shorter, a 2-year payback with cash back even faster if we were able to achieve that 15%. But there were some synergies associated with it as well. First of all, they had another -- a new product line that they could not afford to put out themselves that we -- I give it to -- I joke, I said I gave it to my technical analysis team, and by that I mean my 16-year-old daughter and ten of her friends. We got a very good response to that, so we thought that could be upside. But also our hydrogels that we make are incredible face masks and moisture delivery and hyaluronic acid, and vitamin C, a host of additives and APIs that we can deliver. If you watch a lot of the influencers that talk about lashes and do their UGC, user generated content, on lashes, they're invariably in a bathroom showing you how the lashes are applied, their hair is up and they're wearing undereyes. Well, we make the best undereyes in the world, but we weren't going to start a beauty brand from scratch. So now we have 254,000-plus active customers whom we can now market new products to. So we have several new products coming out in the second half of the year, including our own hydrogel undereyes that we can now market through here. So we see nice growth for our consumer products. On the Medagel side, which was the first brand, which is mostly hydrogel focused, we have a flagship product in SilverSeal. SilverSeal is an FDA-cleared 510(k) wound care product. It is the #1 burn product on Amazon. It is very, very popular. It is our flagship product. It has a tremendous mechanism of action, great claims. It's 94% water with 1.5% ionized silver. We have data that it kills staph, MRSA, strep. It also reduces pain. The pain mechanism is very simple. It's like if you burn your finger, it's throbbing, you put it in a glass of water, pain goes away. Take it out of the water, water starts to evaporate, the throbbing returns. Well, this is 94% water, so it's like putting your finger in the water and never taking it out. We also have data, we did a 40-patient peer-reviewed double-blinded study showing that we reduce the incidence of scarring. So it is a tremendous wound care product. And we recently did a deal with the Cintas Corporation. Cintas began ordering this product in the fourth quarter last year, so that will be the first quarter of revenue from Cintas, and they are putting it in all of their kits for restaurants, firehouses, factories. So this is a big opportunity for us, not only for the revenue, but also because of the awareness, right? You're at work, you burn yourself, you go into the cabinet, there's a SilverSeal branded product in there. The next time you're shopping on Amazon. The next time you're walking down the aisle of Walgreens, there's familiarity with the product. So this is a big deal for us, and the Cintas partnership has already begun. We also have a deal with STADA. STADA is the fourth-largest consumer products company, a health care company in Europe. They do about $4 billion a year in sales. And they have chosen us to help launch their enzyme product line here in the U.S. The first product came out in August of last year. It is doing very, very well ahead of projections. It is a histamine sensitivity DAO supplement. And the idea is they want to move into a line of enzyme products. We're going to have another product -- another two products from STADA in the second half of 2025, with plans to expand even further the [indiscernible] complementary products for SilverSeal as well. So we're very excited they're our partner. They also give us an entree into the European market. So this is going very, very well, and we're very happy with this partnership. Finally, one of the larger opportunities that we have is our relationship with AbbVie/Allergan. AbbVie bought a machine from a company called -- they purchased actually the whole company, Soliton, that had a machine called the Resonic. They paid $550 million for the rights of this machine. It is a sonics-based cellulite treatment for the appearance of cellulite. It's an FDA cleared product that actually has a label for long term, more than a year reduction in the appearance of cellulite. It is a really -- it's pain free. It only takes about 40 minutes for a procedure. All of the other treatments are relatively painful and have downtime associated with them. The product, interestingly, needs a particular frequency and it only works with our gel pads. So it needed a high-water content, biocompatible gel pad to go along with their medical device. That makes us the razor blade, or a razor blade, portion to their razor, which is the machine, and this could actually be a transformative opportunity for us. We'll see. It's going to depend on the rollout. That rollout has been delayed once. It was originally supposed to start in July of last year for us, but they had an issue unrelated to us with the controller. Therefore, they pushed the launch date out about 8 months. So we are expecting our first orders from them this quarter, and as they get closer to launch, that will be sort of the prelaunch and soft launch and training launch. But as they get close to the ramp, this could be a very significant opportunity for the company as well. And finally, this slide just shows our growth. We've grown at over 100% year-over-year for the last 3 years. We've reached a stage where, whenever you start with a new idea and a new technology, you think you have applications that are going to be very attractive, but you don't really know until people start writing you checks. That has begun. We're seeing customers. We know there's a business here now. We know that there's many applications for this technology. I've talked about it on our quarterly calls that these large companies that we've done deals with, it's not the end of them. It takes a long time to onboard a company of that size because of having to pass their quality inspections, having to do validation runs. So it can be 1.5 years before you onboard them, but we have a pretty nice pipeline of new opportunities, and we'll continue to announce new partnerships and new customers as 2025 and 2026 unfold. And that is the presentation.

Thank you very much, Adam. Great to hear your presentation. We are going to now have a Q&A session. So I have some questions, but also we have an audience of 12 investors here with us. And yes, they are welcome to come off mute and ask them, or post them in the chat and I'll read them out. Yes. Okay. So first of all, I've been a shareholder since last summer and just fantastically pleased with how everything is going. I think several times you have put out guidance and then beaten your guidance. And the guidance is already good, and you perform great. Like how are you feeling about how the year has kind of played out 2024? I would imagine good, but I'd just love to hear your kind of high-level qualitative thoughts on how it's all going.

Yes. So it's going well. We're seeing growth in every segment. I mean I think we did -- we took a little bit of pain in the fourth quarter of '23 and the first two quarters of '24, setting up, investing in the new facilities. Getting ready for the business that we thought would come in Q3 and Q4 of 2024. And then, of course, it did come, and that's always nice to see. So we're very pleased by that. But it's been -- it's been nice that everything is growing, right? Usually, you always have a segment that's struggling or section that's struggling. Now all three of our consumer brands are up year-over-year, and I don't see that slowing down, especially as new products come out. And certainly, the Cintas was a big signing, Owens & Minor was a big new customer. We continue to add new customers and grow the contract side of the business as well. So very pleased with how 2024 went.

Yes. How would you -- a lot of your consumer brands, I think, have probably exceeded your expectations. What would you put that down to? Terrific sales team, or like what is the secret sauce in terms of how you've been able to ramp up these products faster than you thought?

Well, we do do a lot of -- I'm a statistician at heart. So that feeds right into what you have to look at when you're dealing with all of the algorithms and the direct-to-consumer business. And we're very efficient at it. Because if you do it wrong, you can generate a lot of sales and lose money. So we're always experimenting. We're always trying. There is always a learning curve when you assimilate something like Silly George. So for example, in Q3 we had great sales ramp, and we saw that what we were doing with our marketing was working and the product was good, which is always more important than what you do with marketing -- you can't do anything with a bad product -- the product was good as well. But we saw it growing and growing very quickly. We didn't know where it was going to stop. And when you're playing blind like that, you sometimes will end up -- invariably will end up overspending because you don't know where it's going to stop. And then you discover where it's going to stop, and then you begin to optimize. And so -- that is an ongoing process. We meet with every one of our advertising teams, in-house and external, for marketing every week, and that's across all the different platforms. And they're very different. TikTok is very different from Amazon, which is very different from Meta. And they each have their quirks and some work better on certain products, but you have to manage all of them.

Yes. On that note, actually, how would you say -- so I think, despite the enormous progress you made this year, I think when you preannounced your earnings for the Q4, they were perhaps slightly less than analyst expectations. And I wondered, is that a result of you pulling back spending in terms of kind of advertising these products and just that refinement process, or would you put that down to something else? Not that I think your performance was in any way bad, I mean, you're still like taking great progress year-over-year and so on. But yes, I know that some people were just expecting more.

Yes. And I understand that, because -- and by the way, historically, we weren't sure either. Historically, when I looked at Silly George, their sales would go up by 60% to 80% during the Black Friday sales pattern. But I'm a little cautious with that. And they gave away the house. And that got them into trouble, that put them in a position where we were able to purchase them for the price we were able to purchase them. So we didn't give away the house. We did 15%. We did our promotions. We saw a very nice increase. It was a good quarter. But remember, there was a big excitement about the product in Q3 because it was new and really kind of started -- had that breakout month in August. So yes, it was up, but it wasn't up a ton. In fact, there was -- there were people who were looking at our -- I don't know how they see it, but someone who was talking about our Shopify sales were actually down in Q4. Well, yes, they were a little bit, but Amazon was up like 140%. So we just shifted some stuff around. But no, the reason was was we really were going after margin. We have to walk a fine line between -- we don't want to be a public company that's just growing, growing and growing, growing, but never is going to break even. And we balance that with we don't want to give up on growth. So we're trying to walk a tightrope in the middle, so that's why the results -- we could have made them bigger on the top line, but at the expense of profit.

Perfect. So we -- let me -- I'll read the question out from Chris. Chris is asking, at one time you felt that the AbbVie relationship could be one of the largest opportunities ever. Do you still feel like that? And can you give us insights on how AbbVie sales could ramp in 2025?

Sure. So, yes, we still do. Obviously, a machine that had paid $550 million for is going to be marketed. It's going to be laid out. We can count on really good revenues for that first 1.5 years or 2 years that they're going to not give up on it because they have a big investment in it. After that, the machine is going to have to perform, right? Now what I like about it, why I'm excited about it, is that there were 12 machines in the market. And so unless AbbVie just wasn't paying attention, they could talk to patients, they could see how that machine was working, they could talk to the practitioners, they could see what revenue was generating, something that they looked at motivated to underwrite a check that big. The only thing we're not in control of is their actual marketing strategy and getting the product -- they redesigned the whole product to make it lighter and easier to use. And they've run in some issues and delays for that that's out of our control, right? So we don't run the -- Allergan -- they run it. So on the one hand, it's a little frustrating that we've had a couple of delays. On the other hand, as they ramp and as they start, they have indicated to us that they're going to be careful. They're going to go out and do a lot of training because I guess they had some issues with CoolSculpt, not training people properly, and they're going to do it as kind of a soft launch. So we think it's going to be revenue starting in Q1 right now. I don't think it's going to be giant in Q1 or Q2, but then as they go into the real launch in the second half of 2025 and then it could be a very, very huge number in 2026.

I was curious about Cintas. I know that you were saying that they're essentially rolling out your product in all of their packages, or -- I don't know quite the phrasing of it -- but I wondered, is that something that essentially immediately ramps and then stays at a fairly level steady level thereafter? So for example, the revenues that you're going to get from that deal in Q1 are likely to be representative of that deal moving forward. But then hopefully, you also get consumers then liking the product and buying it themselves at home. Is that essentially the model?

Yes. We have some experience with Cintas in that we were creating as a private label a product that was in their kits that was our plain hydrogel, similar to the [indiscernible] burn pad, that we made and delivered for another company to [ Spanco ]. Spanco saw SilverSeal and said -- not Spanco, Cintas. Sorry, Cintas, saw Silverseal and said, this is a vastly superior product. We want that. We don't care about the additional cost. This is a much more expensive product. This is what we want to put in all of our kits, and we can go wider with it because it's not just a burn pad, it's also a wound care product. So we know that this product is used at a certain level already. I think we think we're going to have wider distribution because of the additional utility of the product. And the expense, I don't think, is going to factor -- I could be wrong, but I don't think the expense is going to factor into it, because do you burn yourself less often if the product that you're treating yourself with is more expensive? I don't think the employees are thinking like that. So you're still going to have an incidence of burns and wounds that are going to require that pad, and then people that are used to getting the other pad will start using this pad. But it should be a very steady sale for us going forward. They are the masters of replenishment, as you know, Cintas. So that's terrific for us.

In terms of cash flow, I know early last year, I think you were thinking sometime very late this -- sorry, in 2024, early '25 is -- might be your breakeven point. And I think that's been pushed back a little, but your revenues have grown much faster than expected. I wondered if you had an updated time line or updated thoughts or perhaps a breakeven point. When do you think will be the switch to a breakeven cash flow?

Well, I think we're getting close. I mean you saw a big drop in -- and by the way, I'm looking at cash flow. I'm looking at EBITDA and cash flow positive, not -- obviously we have a lot of equipment, so we have a lot of amortization, depreciation, and I'm not counting -- we also -- this is my personal little rant about PCOB accounting, which is we do a lot of -- because we're basically no real large business development team, it's mostly me, we offer a lot of incentives to scientific advisory board members in the form of options that have milestones. And if they don't hit the -- so the minute we issue those, those show up on our P&L as a loss because there's an expense, and it should be. But when they expire because they didn't hit that milestone, we don't ever get that profit back. So I don't really -- that to me doesn't -- is a little nonsensical, but we look at cash flow positive. We're hoping we're getting close right now, and we have announced that we believe that as a whole, 2025 will be a cash flow positive year.

Right. I know that a couple of investors were a little concerned by some of the capital raises. In particular, I think the first one was -- I think it's because, in the context of you said we don't need money to reach breakeven point, but then I think you've raised money essentially to turbocharge growth, which I would argue is good, and you show dividends for that. But I just wondered if you have any comments on kind of the first and then the second raise, how you've used that cash effectively?

There were three raises. Yes. No, it's a great point. There were three raises. But the first two raises were, what I've always said was we didn't need money to get to cash flow positive unless we bought something. So the first raise was $1 million. We paid $800,000 to Kenkoderm, a little bit of working capital to transfer the brand and the assimilation and all that. We then raised another $1 million when we bought Silly George. Because we paid cash for that and had to invest in the new products that were coming out, et cetera. The last raise that we did in August was because of the growth. So we were getting hit with a cash flow crunch from two things. One, Silly George exploded out from under us. I mean we were spending a lot of money on inventory, and we didn't know where that was going to stop. And so we had a large pipeline of inventory coming over. And also Cintas, because Cintas -- so direct-to-consumer is fantastic because you get paid right away, right? So you're really just worried about building up inventory and all that and the advertising spend on direct-to-consumer. But on a delivered good like that to a company like Cintas, we have to buy the silver, which isn't cheap in August, to give you the time line. We then make the gel in our facility in September and October. We then ship that gel down to CG who have to convert and package it. And those sales don't count because it's intercompany sales, it's a subsidiary sale. So that doesn't hit our revenue. Then they have to convert and package and ship to Cintas, and Cintas has 60-day terms. So we're only going to begin to collect the Cintas money at the end of this month. So that created a little bit of need for capital. And also, we were just getting too thin -- the second part of that was we're just getting too thin as a public company. We could have gotten through, but I really didn't want to report a quarter where we only had $400,000 in cash left on the books. It was not a good look. So we put a little bit of money on the balance sheet, took care of what we had to do for our growth, and now we're reaping the benefits of that.

Yes. It sounds like it's a little bit structural in that you're always going to be paid later than you're paying, right? So I wonder, are we going to get into the situation again where you're growing, and that's great, but you're going to need to kind of keep playing catch up a little bit because of how well you're growing.

I think that's going to happen more with if we ever get to retail. Because that's where your cash flow really takes a beating. Direct-to-consumer, you are getting paid pretty quickly. Our pipeline now is where we're no longer behind on Silly George. So we're shipping via sea, not air freighting everything because we're running out of stock. A lot of those things will settle down now that we're getting into more of a cadence. But two things could happen. We could buy something else that would require another raise or get an opportunity like going into retail, because retail is a huge money suck. You have to provide product and make product to lay out in chains that are going to probably going to jerk you around a little bit for payment and they're going to wait until the stuff actually turns over on the shelves. So that's why we've been very cautious about our foray into retail, and probably private label is the way we're going to do the first product, but we'll see how that develops. But yes, you make a good point. I mean, you can sometimes have cash flow issues because your growth is too good.

I'm going to just open it up in case there's anyone who wanted to ask your question has not yet been able to.

I'll jump in just with one question. Adam, obviously, when you look at your business lines, it's very different, the direct-to-consumer with the actual retail consumer brands that you have versus some of your other stuff that's -- what was the decision on how to transition into trying to dip your toes into those consumer brands? And how did you guys feel that you had the expertise in house to take on something like that? And do you continue to feel that's an area of strength for you? And so you talk about if you see these distressed brands or something that you think you could take over and do well at. I'm just kind of curious your thought process on where you're going to head in that space.

So first of all, us getting into retail when we did, direct-to-consumer when we did, was a complete accident due to the pandemic. So I went to an ECRM in October when I first joined the company. And again, my thought process was that private and custom label. And if you guys have ever been to a ECRM, it's like speed dating for companies, right? You have 50 meetings, they have to come because you're paying. And I looked at the list and I'm like maybe two or three of these guys will be interested in what we're doing, there might be good fits, but we'll learn something. We left that first meeting with 28 requests for MDAs. They would walk into the room and go, what's a hydrogel? Then we'd show them and they'd be, "You mean there's no chemicals in this? You mean that this is skin friendly? It's biocompatible? I could deliver my additive?" Everybody was really excited. I went to an international trade show in Milan in February of 2020 and had the same response. But unfortunately, it was in Milan in February of 2020. Came back, my friends teased me I'm patient 0 for COVID here in New Jersey because I then turned on the news 2 weeks later when I was feeling sick and saw the epicenter of the pandemic was outside my hotel I'd just been staying at. So then [indiscernible]. So we're sitting here going, well, what do we do now? And we put some products up on Amazon. We learned how to do that. And I'm a roll-up strategy guy in my previous business. I was an investment banker for 9 years. But prior to that, I ran a company for 25 years that was a roll-up strategy in music labels. And the principles of roll-up is the same, right? You look for synergies, you look for a solid deal in the financials and what they're doing. But when you combine it with what you're doing, you have that potential upside like we found with Silly George. And as it turns out, it was like a perfect fit for me because statistics has always been my strongest mathematical strength. I wish I was smart enough to be an astrophysicist, I'm just not. I don't understand that math. But I do understand stats really well and have an intuitive feel for it. And so optimizing advertising is something now. I'm very proud of our team. I think we do really well. We do it probably as well as anybody that I've ever seen or met. And so I look at most of these companies and I go, well, I can do that better. So we start off with a little bit of an advantage. And then we also look for synergies and product lines and cross marketing and things of that nature. And it's really not rocket science, fortunately.

So just to follow up on that question then. So obviously, you have to have a good product or people won't buy it. But if you find the good product, you feel that your internal skill set on that marketing, advertising, the statistics side of how to enable that is really where your strength comes in.

Yes. Yes. I think we do a very good job. And I think the last two acquisitions have shown that.

how aggressive do you plan on being in this space going forward with other brands that you come across?

Well, there's -- aggressive is always a scary word for me because I've seen, for example, the parent company to this was aggressive in making acquisitions and they made two bad acquisitions that put the company out of business. So if we find something we want, we'll move aggressively to get it, but I kiss a lot of frogs. I look at a lot of companies. I probably look at 2 or 3 opportunities every week or 2, and most of them are garbage. And they're not going to fit, they're not going to work. They have a bad model, they're too overpriced. It's hard to find a good fit. So I'm constantly looking. I'm aggressive in looking, but we're going to be really selective in what we do.

Adam, I had a question in terms of your Q4 results. And I think to a large extent you -- you spoke to that question, but I wanted to see if I could maybe get you to expand upon it, because I guess from my perspective it seemed like it was just a very marginal increase on a sequential basis. I understand what you're saying about wanting to provide margin as well. But does that imply that kind of the strong results you had in Q3 were more due to new product? Or did you actually increase margin in Q4? Or what additional color are you able to provide?

So yes, I got to be careful because we haven't reported Q4 obviously, but you're kind of on the right track, right? Q3 had an explosive August from Silly George, it had the onboarding of Owens & Minor. It had a bunch of things in and of itself that were very, very strong. And then in Q4, it was the onboarding of Cintas and a modest increase in November, but December is not a good month for direct-to-consumer because once you get to December 18, when Christmas is kind of -- deliveries for Christmas are done, then your sales kind of fall off a cliff. So the quarter was better, but it wasn't substantially better because it's just we traded different types of revenue. The good news is we're not going backwards. We're going to continue to see growth not only year-over-year, but we'll see quarter-over-quarter now. We do move more like a step ladder because of the size of some of these onboardings, right? It just so happened that Owens & Minor and Cintas happened bang-bang, Q3, Q4. So those two sort of cancel each other out. But there will be more, but they may not be in sequential quarters, right, the big jumps.

I have no other questions from the audience for now, then I'll ask another one. I was hoping you could expand a little bit on -- I mean, you're working on some products, you're running tests essentially. How are you able to do it at such a low cost? And I'm talking about NEXdrape and the other one, which I've just forgotten the name of. How are you able to do it as such low cost? And then also, what kind of opportunity is that? Like how big is the market for these products? I don't think you alluded to that in your presentation.

Yes. So the surgical market -- the surgical drape market. So on the incise drape, we did run into a production snag with that that we talked about about 2 years ago, because that project has been around for a while. We made a surgical drape that performed beautifully. But we -- and we went -- met with the FDA, and the agency gave us a very clear, pretty simple path forward for a 510(k). We were going to use the, I think, the Steri-drape as our predicate device, and it was a fairly straightforward process. It wouldn't have been a lot of money. But when we went to make it at scale to show them a production run, we realized that this particular gel is so viscous that our pumps and dies caused streaking. We couldn't properly apply it. So it was an application problem, a solvable application problem. We went to a die company that made us -- they lent some dies that thought would be appropriate. Those dies work beautifully. But that whole setup of dies and pumps probably cost $350,000. And we had so much going on that that kind of got pushed to the back burner a little bit. And now Kip Crecca has joined us from STAAR Surgical he was at before that, and he's in that market. He had a very practical solution for us, which was, hey, just sell the adhesive to somebody. Cataract surgery is the #1 surgery in the U.S. And I don't know the numbers on it exactly, the dollars associated with it, but we would be a tiny fraction of that market, because what we'd like to do, the biggest complaint -- cataract surgery is very easily done. It's done all the time. The biggest complaint patients have, because they're elderly, is that the drape tore their skin on removal or caused a rash or hurt them in some way. So if we could sell our adhesive to a company that's in that space, that's kind of low-hanging fruit. So that doesn't require -- we do all the development of these gels in our own facility with our own staff that we're paying anyway as part of our fixed overhead. When we're doing -- we have to also be smart. When we're do in the Apremilast study. We're doing it in Canada. We're a compound pharmacy, and we have a top dermatologist who is doing it with us, and he's prescribing it. So they're allowed to compound it. They're allowed to prescribe it. He's tracking the results that he's getting. And this is proof of concept [ add ]. This is not going to qualify for the FDA. It's not part of a Phase I study. That will come when we feel we have good enough data to either attract investors to spin it out or sell it to a larger company who can then take the development from there. So we're spending tens of thousands of dollars, not large money, on these projects.

We've had a question come in from Florian. When you talk about EBITDA profitability, does that exclude minority interest earnouts, et cetera?

Minority interest being I'm not sure I understand the question. What are we excluding?

Florian, do you want to come off mute and elaborate a little bit? Maybe Florian is not able to.

We look at cash flow. Our definition of adjusted cash flow EBITDA is minus depreciation, amortization and stock-based comp. So when I give out those options or the Board gives options or something like that, that's not -- that we don't count that in cash flow positive or negative.

Sure. Okay. I was interested in the STADA partnership. I think that you're already selling one of their products here. I know that there was a part of the deal where they would start to sell your product. I wondered, is that -- how is that part of the deal going or what can we expect?

Well, it's going a little slowly for SilverSeal because of regulatory. The CE regulatory body, MDR, has decided that SilverSeal there -- it's not here, but there, it's a Class III medical device. So that's going to delay us a little bit. We're going to have to do some more studies. We're going to have to satisfy Class III MDR. We are now MDR compliant for our own self-certified Class Is. But the biggest-selling product we have to Silverseal and the fact that, that's a Class III is a little bit of a disappointment, but we'll get it done.

Yes. All right. I'm going to open it up one more time. I've asked most of my questions. So I think everyone is mostly finished. Yes, so last one for me. What are you most excited about in 2025? And then also, what do you think the biggest risks to your business might be?

So I'm most excited about some of the other large customers that we're talking to, different applications. I mean, I've seen folks. And again, some of these don't know are very early stage stuff, but -- we've had inquiries from people in aerospace. We've had inquiries from people in monitoring. We've had all sorts of different types of medical devices. It seems to be that if you can make sheets of water, there's a lot of applications. Very interested in how the study is going to be published sometime at the end of March is -- you never know exactly when studies are going to be published, so that's kind of the target for presenting on our effect on the carcinogenic plume for laser hair removal and tattoo removal. We've talked about that in previous press releases. That's an exciting opportunity. So a lot of excitement around that, a lot of excitement around new products coming out. We're going to have at least two new products on [ MEDAGEL, we're going to have new indication lines on Kenkoderm. We're going to have five or six new products on Silly George as we begin to expand and use our hydrogels to market beauty and cosmetics, as well as lip glosses, and now moving into a true beauty company as opposed to just an eyelash company. So all of that's very exciting. The growth of CG is exciting, Cintas is exciting. What do we worry about? Well, the biggest worry is also the greatest excitement. What keeps me up at night is things I can't control. What if AbbVie screws up their machine? It's not like we go out of business, but it's a big part of our excitement. It's a big opportunity for us. But I'm not in control of that. They have to market it well. Now Allergan should be able to, right? They know what they're doing, and they certainly have had success in that field. But again, I'm a little bit of a control freak, and if I'm not in control, I do worry about that. The biggest worry I used to have was: will people really care about this product? I think that's been answered affirmatively now.

Okay. One last. I remember, we didn't touch on it. You've mentioned it in presentations before, but just for those who haven't heard about this, can you talk about operating leverage? What kind of capacity are you at in your machine where you make hydrogel just to show like how much room you have still to grow without needing more machines.

Yes, we're probably only at about 18% right now. We were at 4% when I started with the company. So it continues to grow. We're not even on one shift all the time, right? So these machines are built to run 24/7, you can actually run 3 shifts if you had to. And we're not even running every week sometimes. So the machine has a lot of capacity. Where we had a bottleneck I talked about was in converting and packaging. But now with the new clean room and the CG labs, that constraint is taken away, too. We have lots of room for expansion there, both in the warehouse and in the clean room for new machinery if we need it. So we have room to grow now.

Great. Well, Adam, I think that's all the questions. So thank you very much. It's been a pleasure to hear from you, and thanks for coming on Breakdown Investor Show and talking to us about NEXGEL.

Well, thank you so much for your interest, and I appreciate all the good questions. Thank you, everybody.