NEXGEL - Q2 2024

Transcript

Valter Pinto (Head of Investor Relations)

Thank you, operator. Good afternoon, and welcome, everyone, to NEXGEL's Second Quarter, 2024 earnings conference call. I'm joined today by Adam Levy, Chief Executive Officer, and Adam Drapczuk, Chief Financial Officer. Before we begin, I'd like to remind everyone that statements made during today's conference call may be deemed forward-looking statements within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties, and other factors. For a detailed discussion of some of the ongoing risks and uncertainties in the company's business, I refer you to the press release issued this evening and filed with the SEC on Form 8-K, as well as the company's reports filed periodically with the SEC.

The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, unless otherwise required by law. With that, it's my pleasure to turn the call over to Mr. Adam Levy. Adam, please go ahead.

Adam Levy (CEO)

Thank you, alter, and thank you everyone for joining us today to discuss our second quarter, 2024 financial and operating results. The second quarter of 2024 was a record revenue quarter for the company, totaling $1.44 million, an increase of 23.4% year-over-year and 13.8% sequentially. Branded consumer products revenue was a key growth driver, totaling $968,000, as compared to $259,000 in June of 2023. Included in the year-over-year branded customer product revenue comparison is our Kenkoderm product line, which we acquired in December of 2023, and about half a quarter of contribution from our new acquisition of Silly George.

Silly George offers its loyal customer base a full product line of eye and eyelash products, including hassle-free alternatives for eyelashes and eyelash care, such as lash extensions, lash serum, and various accessories. Silly George is predominantly sold direct-to-consumer, not only in the United States, but internationally as well. Silly George has built a large social media following and consumer database, which includes 88,000 Facebook and 83,000 Instagram followers, as well as over 250,000 unique customer emails. When we acquired the brand, its revenue rate was approximately $2 million. Since then, we have launched new products, such as a new line of Pop-On lashes, leveraging new lash technology to create non-toxic, long-wear eyelash extensions that are easy to apply and remove and can last for 5-10 days. We also implemented new marketing strategies.

We acquired Silly George in May for $600,000 in cash, common stock, plus a future earn-out. In short order, and as a result of new products and marketing, as we announced in July, I am pleased to confirm Silly George continues to perform well and that July sales alone were over $380,000 on Shopify only. While consumer product sales can fluctuate, we continue to be excited with our acquisition. Additionally, we are only just now releasing our Pop-On lashes on Amazon. In the contract manufacturing side of our business, we completed the expansion of our capacity in Texas to support the new client relationships that we have. We doubled our square footage and invested in state-of-the-art automated machinery and related clean room facilities.

During the quarter, we had some remaining capital expenditures related to this expansion in the amount of $209,000 and expect that number to be minimal in the back half of the year now that we have completed the expansion. Due to our expansion in the quarter, revenue was impacted as we shut down the facility for a period of time to move equipment and validate it prior to restarting operations. We expect revenue to be more normalized going forward in Q3 and Q4. Our relationship with STADA continues to progress well. We recently announced our first product, Histasolv, which is sold as Daosin in Europe. This is Europe's number one selling diamine oxidase enzyme supplement, generating well over $20 million in annualized revenues to treat histamine food intolerance, which can cause migraines, headache, gut issues, and skin conditions.

We have just launched Histasolv on Amazon and our marketing campaign is starting this month. Subsequent to the quarter, we announced a supply agreement with Cintas Corporation, a leading provider of corporate identity uniforms, first aid, and safety products and services to over 1 million businesses across North America, to distribute our flagship product, SilverSeal. Cintas will distribute SilverSeal to its customers in many sectors, such as hospitality and public service. As a hospital-grade hydrogel dressing for wounds and burns, the employees of Cintas' customers are the ideal target audience for this product. This partnership is significant to us, not only for the associated revenue, but also for SilverSeal's brand awareness. We expect the first order of SilverSeal to be delivered during the fourth quarter of 2024.

We recently issued revenue guidance for the third quarter of $2.2 million, an increase of 83% year-over-year, and for the fourth quarter of $2.6 million, an increase of over 140% year-over-year. Our revenue guidance still does not incorporate any revenue from our partnership with AbbVie as the exclusive supplier of gel pads for their Resonic rapid acoustic pulse device for reduced cellulite appearance. We still expect revenues to start in Q1 of 2025, and we continue to work closely with their team on the launch. At this higher expected quarterly revenue level in Q3 and Q4, we are getting very close to achieving our goal of generating positive cash flow from operations.

Lastly, earlier this week, we completed a financing led by insiders for gross proceeds of $1.11 million at attractive terms. This financing will replenish our balance sheet with the investment dollars we spent for Silly George and also provide us with working capital to buy inventory and increase the marketing spend for the brand. With that, I would like to turn the call over to our CFO, Adam Drapczuk. Adam?

Adam Drapczuk (CFO)

Thank you, Adam. Today I'll review financial highlights of our second quarter, 2024 results. For the quarter ended June 30, 2024, revenue totaled $1.44 million, an increase of $273 thousand or 23.4%, as compared to $1,117 thousand for the quarter ended June 30, 2023. The increase in revenue was driven by sales growth in branded consumer products, including approximately 45 days of revenue from Silly George, partially offset by a decrease in contract manufacturing. Contract manufacturing was impacted by CGN's move into its new facility and will normalize and grow in Q3 and Q4.

Gross profit totaled $410,000 for the three months ended June 30, 2024, compared to a gross profit of $175,000 for the three months ended June 30, 2023. The increase of $235,000 in gross profit year-over-year was primarily due to the increase in branded consumer products. Gross profit margin for the second quarter of 2024 was 28.5%, compared to a gross margin for the second quarter of 2023 of 15% and a gross profit margin of 21.9% in the first quarter of 2024.

Cost of revenues increased by $38,000 or 3.8% to $1,030,000 for the three months ended June 30, 2024, as compared to $992,000 for the three months ended June 30, 2023. The increase in cost of revenues is primarily aligned with sales of branded consumer products, partially offset by a decrease in cost of revenues from lower contract manufacturing revenue. Selling, general and administrative expenses increased by $506,000 or 57.4% to $1,390,000 for the three months ended June 30, 2024, as compared to $882,000 for the three months ended June 30, 2023.

The increase in selling, general and administrative expenses is primarily attributable to an increase in advertising, marketing and Amazon fees attributable to promotion related to Kenkoderm and Silly George. We expect these costs to increase in Q3 with a full quarter of Silly George revenue and with further growth in branded consumer products. Research and development expenses increased by $21,000 to $76,000 for the three months ended June 30, 2024, from $55,000 for the three months ended June 30, 2023. Net loss for the three months ended June 30, 2024, was $979,000, as compared to a net loss of $642,000 in the three months ended June 30, 2023.

As of June 30, 2024, the company had a cash balance of approximately $1.1 million. Subsequent to the end of the quarter, the company closed on a registered direct offering of $1.11 million, led by insiders. The use of proceeds for the financing is for working capital and the immediate requirement for additional inventory and marketing to meet the higher than expected demand for the Silly George brand products. The company believes it has sufficient cash and marketable securities to operate its business plan into 2025. As of August 14, 2024, NEXGEL had 6,324,266 shares of common stock outstanding, which does not include the 444,000 shares of common stock we anticipate issuing in connection with our recent offering.

I would now like to open the call for questions. Operator?

Operator (participant)

Thank you. Ladies and gentlemen, if you would like to ask a question, please press the star followed by the one on your telephone keypads. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one to ask a question. We'll pause for a moment to allow the questions to enter the queue. We'll take our first question while we wait from Bill Odenthal from COVA Capital Partners. Please go ahead.

William Odenthal (Managing Director Investment Banking)

Hi, Adam, and then team. I have two questions. One's relative to the quarter and Silly George, and just trying to get a little more clarity on it. In your press release, you said that Silly George did more than $380,000 in revenues in July only on Shopify and not including Amazon.

Adam Levy (CEO)

That's correct.

William Odenthal (Managing Director Investment Banking)

So if you annualize that, I'm just trying to get an idea of your expectations of the success of, you know, revenues. If you annualize the $380,000 and $4.5 million on the year, your guidance for the third quarter is $2.2 million in sales, and guidance for the fourth quarter is $2.6 million in sales. So, is this then should, I mean, will this impact the second half of the year if July is indicative of what's going on in the business, how do you guys look at this?

Adam Levy (CEO)

So, you know, consumer products are always tough. Thanks for the question, Billy. Consumer products are always tough because of their unpredictability. Right now, it appears very, very strong. We know when we made those projections, we were at a lower run rate, and the run rate is growing. We are hopeful, and the reason we are going to increase our spend a little bit is because we believe there's an excellent chance that that product line continues to grow and will end up being an amazing acquisition. So yeah, if it continues to grow at that pace, then we're probably gonna perform really well in the second half.

William Odenthal (Managing Director Investment Banking)

Okay, and-

Adam Levy (CEO)

It's always an if with a consumer product, though, buddy.

William Odenthal (Managing Director Investment Banking)

Yeah, I got it. I got it. And the second question is relative to Cintas. So when, when should we start to expect revenues from Cintas? And, I'm not sure, have you, Cal, have you given any guidance or expectations as to what kind of deal this could be?

Adam Levy (CEO)

Revenue from Cintas is going to start in the fourth quarter. In fact-

William Odenthal (Managing Director Investment Banking)

Right

Adam Levy (CEO)

... the orders for the gel required for CG, converting and packaging to make the product, have already been placed with us, and that, that gel is already in manufacture, but the products will ship in Q4. It is a very important part of our drive to try to become cash flow positive because, you know, while, while consumer product revenues are fantastic and our margins are very good, you know, because of the fixed costs, both at CGN and at NEXGEL, contract manufacturing dollars actually mean more to the bottom line, almost 3-to-1. So, so we're very excited about that revenue stream starting, as well as another large customer that we recently onboarded. The, the Cintas opportunity is certainly in the fourth quarter, multiple hundreds of thousands of dollars, and it will continue with a reorder pattern.

As I said, it will be significant revenue.

William Odenthal (Managing Director Investment Banking)

I'm sorry, I had one last question. It's relative to AbbVie. So, in your press release in July, you put these, with the expectations of third quarter and fourth quarter revenue out, and you also stated that these expectations are without any revenues predicted from AbbVie. Can you give us an idea, where that, what the status is with AbbVie and maybe a little, if you can drill down on the timing, first quarter, second quarter, what you're kind of expecting?

Adam Levy (CEO)

Yeah, so we communicate with AbbVie regularly, although not as much since we're now done and in design lock. Our original expectation was that revenues would start in Q3 right now. And then we did announce-

William Odenthal (Managing Director Investment Banking)

Right

Adam Levy (CEO)

... that, you know, AbbVie had a delay due to their console, and so the revenues, everything was delayed. The whole project launch was delayed six months. That puts us into revenues starting in Q1. Now, that is the soft launch part, so the revenues will begin in Q1, and they will ramp as we move into Q2, and then full launch in Q3. But the revenues are decent and will start, you know, in Q1. So that's when we expect to have AbbVie become accretive to our bottom line.

William Odenthal (Managing Director Investment Banking)

Perfect. Got it. Thanks, bud. Appreciate it.

Adam Levy (CEO)

Okay.

Operator (participant)

Thank you. Next, we're going to remind everyone it is star one for a question, and we'll next go to Eric Ramos with Titan Capital Management.

Eric Ramos (Analyst)

Hi, Adam. I just wanted to say congrats on the quarter. And I have a few questions, if that's okay. One of them is kind of starting with the Silly George. You guys are obviously saying that you guys have really high run rate revenues with just, Shopify, and I was kind of wondering how you expect that to evolve with the addition of Amazon, and then what you kind of think the growth margin looks like as you kind of start paying those seller fees to Amazon as well. Does that stay kind of consistent or does that kind of decline?

Adam Levy (CEO)

So that's a great question. You know, the answer about how Amazon will affect the Shopify sales, quite frankly, is I don't know. I've never seen a product go this big on Shopify before Amazon even existed. So overall, we anticipate Amazon to be accretive. What I don't know yet is, of the shoppers and of the billing that we do, for every $1 we do on Amazon, are we stealing $0.25 from Shopify? Are we stealing $0.50 from Shopify? How does that break down? As far as the margins go, we look at both of them very similarly. And the biggest control that you have in direct-to-consumer business is your cost of advertising.

And we just create an allowable on Amazon, where the audience already exists, that is a much lower advertising, I call it tolerable, ACoS and TACo, that allows for that extra commission that Amazon charges, so that the results are about the same. So we try to get the same margin on both Amazon and Shopify to make us kind of agnostic as to where the customer goes. We just want the customer journey to be as simple as possible. But as far as how cannibalistic Amazon will be, I'm not sure. Never seen it before. Did that answer your question?

Eric Ramos (Analyst)

Yeah, no, definitely.

Adam Levy (CEO)

Yeah.

Eric Ramos (Analyst)

And then another thing, I was kind of curious about the AbbVie RESONIC agreement. I don't know how much you're able to share, but can you maybe give us your kind of baseline expectations for pricing per treatment, as well as kind of the amount of treatments you expect to see on, you know, like a daily, monthly, yearly basis for each of these machines?

Adam Levy (CEO)

So we don't really know how many treatments there will be other than some internal projections of demand, which we're under NDA for, that you know we got from AbbVie, and of course, the success of the machine is going to determine that. I can tell you that these are large pads. They're 8 by 8 pads. Each procedure uses at least two of them, and depending on the packaging choice that AbbVie has selected, it's either. It's somewhere between the range of $3.50-$5 a pad, so double that per treatment.

Eric Ramos (Analyst)

... That's really helpful. And then are you able to give any kind of insight into what you think the gross margins on those kind of sales are going to look like?

Adam Levy (CEO)

Yeah, so the gross margins kind of flow through two places, because we treat CG converting and packaging, or CGN, as I call it, as an arm's length transaction. You know, they're gonna have margins much like, you know, medical device contract manufacturing in that 30, 35, you know, 40% range, somewhere between 30 and 40. And but they're buying the gel from us, so we also make additional margin on that. So it's not unreasonable to expect, greater than 50% margin overall.

Eric Ramos (Analyst)

Got you. That's really helpful. I think that's all I had. Thank you guys so much.

Adam Levy (CEO)

Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, that is star one for a question. We'll pause for a moment. With no further questions, thank you. We're going to turn the call back to Mr. Adam Levy for final remarks.

Adam Levy (CEO)

Thank you, operator, and thanks everybody for joining the call. You know, we've worked very hard in Q1 and Q2 to sort of set ourselves up for success in Q3 and Q4, and I think everything that we've built towards will come to fruition in Q3 and Q4. So we're very anxious and excited to get there and get to the results from those quarters, because we've done a lot of work and made a lot of investments to get us to this point. So thank you all for staying with us and supporting the company, and hopefully you will be impressed by what actually happens in Q3 and Q4. Thank you.

Operator (participant)

That does conclude today's program. Thank you for your participation. You may disconnect at any time.