Q3 2024 NEXGEL Inc Earnings Call
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Adam Drapczuk
Speaker Change: You may register to ask a question at any time by pressing star 1 on your telephone.
Speaker Change: And just a reminder, today's call is being recorded, and if you should need any operator assistance during the call, please press star zero. Now at this time, I'll turn things over to Maria Holcutt, Account Director of KCSA Strategic Communications for introductions. Maria, please go ahead.
Maria Holcutt: Thank you, Operator. Good afternoon and welcome everyone to NextShell's 3rd Quarter 2024 Earnings Conference Call. I'm joined today by Adam Levy, Chief Executive Officer, and Adam Drapczuk, Chief Financial Officer.
Maria Holcutt: Before we begin, I'd like to remind everyone that statements made during today's conference call.
Maria Holcutt: 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.
Maria Holcutt: 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 8K, as well as the company's reports filed periodically with the SEC.
Maria Holcutt: The company disclaims any intention or obligation to update or revive any forward-looking statements whether as a result of new information future events or otherwise unless otherwise required by law
Maria Holcutt: Also, during the course of today's call, we will refer to certain non-GAAP financial measures. Reconciliation of the non-GAAP-to-GAAP financial measures and certain additional information are also included in today's press release.
Speaker Change: With that, it's my pleasure to turn the call over to Mr. Adam Levy. Adam, please go ahead.
Adam Levy: Thank you, Maria, and thank you everyone for joining us today to discuss our third quarter 2024 financial and operating results.
Adam Levy: The third quarter of 2024 was yet another record quarter for the company across all of our key financial metrics.
Adam Levy: Revenue for the third quarter totaled $2.94 million, an increase of 141% year-over-year and 104% sequentially.
Adam Levy: Gross profit margins for the quarter were 43.6% as compared to 28.2% for the same period last year and 28.5% in the previous second quarter.
Adam Levy: Branded consumer revenue increased 99% sequentially, while contract manufacturing revenue also increased approximately 103% sequentially, contributing to the margin expansion year-over-year and sequentially.
Adam Levy: Adjusted EBITDA, which is a non-GAAP financial measure, narrowed from a loss of $788,000 last quarter in Q2, 2024, to $347,000 in Q3, 2024.
Adam Levy: Becoming cash flow positive has been a priority of ours. With the growth we experienced in Q3, growth which we expect to continue into Q4, we are very close to achieving this goal.
Adam Levy: In branded consumer products, the third quarter was the first full quarter of revenue contribution from our Silly George brand, a beauty and cosmetics company focused on eyeliner, fake eyelashes, lash growth serum, and mascara.
Adam Levy: As a reminder, when we acquired the brand six months ago in May, Silly George was on a revenue run rate of approximately $2 million.
Adam Levy: We also continue to see year-over-year growth from both our CancoDerm and MetaGel brands.
Adam Levy: In contract manufacturing, Q2 saw the completion of the expansion of our Texas facility in order to support the new client relationships we have and the resulting increases in demand.
Adam Levy: Due to our expansion during the second quarter, revenue was impacted by the shutting down of the facility to move equipment and validate it prior to restarting operations.
Adam Levy: Contracts manufacturing in Q3 normalized, increasing from 425,000 in Q2 to 864,000 in Q3, an increase of approximately 103%.
Adam Levy: Our relationship with Stata continues to progress well. We recently announced the release of our first product, Pistasol, which is sold as Deosin in Europe.
Adam Levy: 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 and headaches, gut issues, and skin conditions.
Adam Levy: In Q2, we announced a supply agreement with Sintas 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 Silver Seal.
Adam Levy: Cintas will distribute SilverSeal to its customers in many sectors such as manufacturing, hospitality, and public service.
as a hospital-grade hydrogel dressing.
Adam Levy: For Wounds Burns, the employees of Centasa's customers are the ideal target audience for this product.
Adam Levy: This partnership is significant to us, not only for the associated revenue, but also for Silverseal's brand awareness.
Adam Levy: The first orders of Silver Seal are being delivered during the current fourth quarter of 2024, which will contribute to our expected revenue growth quarter over quarter.
Adam Levy: In addition to our branded products and contract manufacturing businesses, we have several aspirational shots on goal in medical device applications.
Speaker Change: Laser hair removal is proven to be effective in permanently removing hair. However, it can be associated with the release of a plume that contains airborne particles and hazardous organic compounds, which, if inhaled, may affect the short-term and long-term health of professionals providing the treatments.
Speaker Change: So much so, that presently, well over a dozen states have enacted legislation mandating the use of plume evacuation systems in order to mitigate the hazards and risks of exposure to the plume.
Speaker Change: Our high-water content hydrogel potentially may offer a long-needed industry-wide solution for absorbing and capturing plume during laser hair removal when applied to the surface of the skin before the procedure begins.
Speaker Change: In addition, the application of hydrogel may also allow for more effective laser hair removal, reduce the amount of pain experienced during the treatment, and could be a practical solution for the future that meets the requirements for regulatory compliance.
Speaker Change: Together with Vanilay, we have initiated a human trial being conducted at the Florida Clinical Research Center by plastic surgeons.
Speaker Change: Our hydrogel will be applied to 30 patients prior to laser hair removal treatments with the primary outcome measure being the reduction of plume in the air during these procedures. We expect top-line data from the study during the fourth quarter of 2024.
Speaker Change: There are many untapped potential applications for our unique hydrogel technology.
Speaker Change: Upon receiving successful data, we can launch commercially into the large laser hair removal market.
Speaker Change: We recently appointed Kip Krecker to our scientific advisory board who brings over two decades of medical device sales and management experience
Speaker Change: He currently serves as VP of North America sales and microsurgical technology, a leader in the development of advanced surgical instruments and solutions, as well as sitting on the board of directors at Ocular Science, a biotech company focused on cost-effective innovative eye care products.
Speaker Change: Prior to his current roles, Mr. Kreka served in various sales leadership positions at companies including Star Surgical, Abbott Medical Optics, Stryker Endoscopy and more.
Speaker Change: While our contract manufacturing and branded product division continue to perform well and grow significantly, we certainly feel confident that we will unlock other large commercial applications for our hydrogel.
Speaker Change: With that being said, R&D and exploration to each of these opportunities will be done so thoughtfully and strategically, managing cash appropriately and not overextending our resources, pursuing paths that will not leave hot that will not lead to a high ROI or be core to our vision of the company's future.
Speaker Change: Looking ahead into Q4, we expect continued growth across all of our revenue lines.
Speaker Change: We expect revenue to exceed $3 million and operating cash flow to continue to improve and approach positive in Q4.
Speaker Change: As a reminder, our revenue guidance for Q4 still does not incorporate any revenue from our partnership with AbbVie as the exclusive supplier of gel pads for their Rosonic Rapid Acoustic Pulse device for reduced cellulite appearance.
Speaker Change: We still expect those revenues to start in Q1 of 2025, and we continue to work closely with their team on the launch.
Speaker Change: Lastly, earlier this week, we completed a financing for gross proceeds of approximately $2 million at attractive terms.
Speaker Change: Insiders, including members of the management team and board of directors, participated in the offering. Insiders are subject to a six-month lock-up period from the date of closing.
Speaker Change: This financing will provide us with working capital to buy inventory and increase the marketing spend for our brands and support the growth of our receivables from our large customers.
Speaker Change: With that, I would like to turn the call over to our CFO, Adam Drapczuk. Adam?
Thank you, Adam.
Adam Drapczuk: Today, I'll review financial highlights of our third quarter 2024 results.
Adam Drapczuk: and an increase of approximately 104% as compared to the second quarter 2024.
Adam Drapczuk: The increase year-over-year and sequentially in overall revenues was primarily due to sales growth in branded consumer products and contract manufacturing.
Adam Drapczuk: Gross profit totaled $1.28 million for the third quarter 2024, compared to a gross profit of $344,000 for the third quarter 2023, and gross profit of $410,000 for the second quarter 2024.
Adam Drapczuk: The increase of $936,000 in gross profit year-over-year was primarily due to the increase in branded consumer products.
Adam Drapczuk: The increase of $870,000 in gross profits sequentially was primarily due to the increase in branded consumer products and contract manufacturing.
Adam Drapczuk: Gross profit margin for the third quarter of 2024 was approximately 44%, compared to a gross margin for the third quarter of 2023 of approximately 28%, and a gross profit margin of approximately 29% for the second quarter of 2022.
Adam Drapczuk: General, selling general and administrative expenses increased by 1.2 million or approximately 118 percent.
Adam Drapczuk: to $2.07 million for the third quarter 2024 as compared to $950,000 for the third quarter 2023.
Adam Drapczuk: The increase in selling general and administrative expenses is primarily attributable to an increase in advertising, marketing, and Amazon fees, which increased $819,000.
Adam Drapczuk: Net loss for the third quarter 2024 was $754,000 as compared to a net loss of $552,000 for the third quarter 2023.
Adam Drapczuk: As of September 30, 2024, the company had a cash balance of approximately $1.1 million.
Adam Drapczuk: Subsequent to the end of the quarter, the company closed on a registered direct offering of two million dollars with insiders and the board participating.
Adam Drapczuk: 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 Sylvie George brand products.
Speaker Change: I would now like to open the call for questions, operator.
Speaker Change: Thank you, Mr. Drapczuk. Ladies and gentlemen, at this time, if you do have any questions, simply press star 1, and if you find that your question has already been addressed, you may remove yourself from the queue by pressing star 2. Again, star 1, please. And we'll go first this afternoon to Naz Rahman of Maxim Group. Naz, please go ahead.
Naz Rahman: Hi everyone, thanks for taking my questions and congrats on the call. I just have a few
Speaker Change: I guess, strategically, what are you sort of thinking about in terms of what happens in the next job, what do you do next when you become cash flows positive, like what initiatives could you engage in or what projects do you take on once you sort of make that turn?
Speaker Change: Well, it's good to hear from you again. You know, that turn is always important. And I've said this before that, you know, when you're running a public company and you're not cash flow positive, you're playing defense.
Speaker Change: and Becoming Cashflow Positive allows you to switch over to offense.
Speaker Change: So there's a lot of things that we can do. We can certainly think about additional acquisitions. We can think about additional expansion. You know, what those will be exactly. You know, we've always been opportunistic.
Speaker Change: So, you know, we're kind of part roll-up strategy, we're trying to grow our consumer products, and we have some other very large customers we're engaged with right now, and continuing to develop the products with them and bringing them on board is really our focus right now.
Got it, that was helpful. Under laser hair removal...
Speaker Change: Could you talk about what the following steps would be to get that approved for that indication? Would you have to file a PMA? Or I guess, what are the regulatory steps following the study readout? And what do you think would be the timeline to?
have your hydrogel incorporated into that procedure commercially.
Speaker Change: So the study is really primarily, it's not, there's no real regulatory requirement for it.
Speaker Change: The study is really to show that it suppresses the plume and to allow us to commercialize.
Speaker Change: We'll be able to make claims about suppressing the plume, we'll be able to make claims about the reduction of pain for the patients, assuming that's one of the endpoints we hit, and we'll be able to make claims for greater efficacy, which has been a pleasant surprise in the early data, but obviously we'll see what happens with that once all the data is together and we announce it later on this quarter.
Are there any problems with that study?
Speaker Change: sorry no no that study that study is being funded by Bantalay we did not pay anything to fund that study they're doing it because they want to be our marketing partner and distribute to the laser hair removal companies
Got it. And I guess I have one last question.
Speaker Change: and that fits in that paradigm. Could you talk about what you kind of expect to see in terms of potential unit or revenue acceleration for holiday season, and I guess like at least for what products?
Speaker Change: yeah so by the way I'd never I didn't answer your part of the question on the laser hair removal we think revenues could start as soon as the first half of next year on that as soon as the study results are released
Speaker Change: So when it comes to the holiday season for Silly George, this is obviously our first season with the new products and with Silly George going into Christmas holidays. Historically, they've seen a very nice bump up in sales during the month of November, is historically their best month.
Speaker Change: But one of the reasons I've been a little cagey about what we're going to do in Q4 is because, having not done it before,
Speaker Change: You know, it could be very, very big, it could be moderately big, it could be anything in the middle. I'm just not 100% sure, but we are expecting and gearing up for a very big and successful Black Friday and Christmas season.
Speaker Change: One more question if you don't mind. I know one of the initiatives you've been working on is expanding your distribution both to retail and Europe. Could you just provide some comments on where you are at on that process?
Speaker Change: Sure, so we do have some partners in Europe now that are interested in taking the product in. I think you'll start to see some European deals come to fruition in the first half of 2025. Just some regulatory steps and things like that to jump through. And then here in the States,
Speaker Change: We are in front of Walgreens, we are in front of a couple of large retail operators, and hopefully, you know, they only do the Plantagrams once a year. When these Plantagrams come due, we will be selected in there, and we'll start to see Silverseal, probably the first product in stores.
Speaker Change: here in the U.S. sometime in 2025. We also are very close now to getting our approval for Canada, smaller market, but we should be able to soon start selling Silver Seal up in Canada, both on Amazon and at retail.
Speaker Change: Got it. Thanks a lot for taking my questions. And once again, congrats on the progress.
Thanks. Thanks a lot.
Speaker Change: Thank you. And just a quick reminder, star 1 please for questions. We go next now to Michael Gustaitis at OnePride.
Speaker Change: Hey Adam, congratulations on another record quarter. I was going to ask a question about the retail, but I just heard that good news. I was wondering if you could elaborate a little bit on the laser hair removal as far as the size of that opportunity and as another aspirational project with the next straight. I was wondering if you could have any potential numbers, any ballpark numbers for what those would look like.
Speaker Change: Yes, so as far as the next drape goes, we brought Kip on to really push that program forward. He's had some very interesting ideas for the use of our adhesive in other drapes that could actually be
https://www.youtube.com
Speaker Change: market. It's early stage, so we'll give you more news on that as the weeks progress, but the entire surgical drape and using our gel, which is a patented application for surgical drapes.
Speaker Change: is something that he was specifically interested in and specifically joined the company in order to move forward.
Speaker Change: As far as the size of the market in laser hair, I'm embarrassed to say that I don't know what that is. I do know it is a very, very large and growing market, but I don't have access to the data of exactly how big it is in the U.S.
Okay, thank you very much and congratulations again.
Okay, thank you.
Speaker Change: We'll go next now to George Merrimah at Peripo Adventures. George, please go ahead.
All right. Thanks, Adam.
Hi George, how are you?
Speaker Change: Real nice improvement on the gross margins. If you look out to 25 from kind of a high-level view, as your volumes increase,
Speaker Change: I know there's a difference with the volumes in different businesses and then the product mix but just on a broad spectrum as your volumes go up in 25
Speaker Change: How will gross margin move when you have higher, higher, you know, higher capacity and...
utilization rates and such.
all that look.
Speaker Change: So, yeah, so that's a great question. I'm going to give you a kind of complicated answer.
Speaker Change: First of all, thank you for the compliment on the improvement of gross margin, but it's not entirely...
Speaker Change: true in Q3. And when I say true, those are the gross margins, but remember it's skewed by the explosion in Silly George.
Speaker Change: and if you notice a lot of that gross margin improvement is offset by the large increase in sales and marketing that drove our SG&A up so it's just really we really segment our business in terms of gross margin because
Speaker Change: If you look at how consumer products are done, well, they have, you know, 85 to 87% gross margin because everything's below the line. The real expenses of direct-to-consumer marketing are all advertising.
Speaker Change: So that skews really good gross margin up top. The actual gross margin from the contract manufacturing side will see tremendous improvement in Q4 because that
Speaker Change: Billing is actually, the good news is that billing is actually more important to reducing our EBITDA loss and becoming cash flow positive than the silly George revenue.
because that revenue is in a facility that's underutilized.
Speaker Change: So, all we really have as expenses against it is cost of materials because the salaries are paid for, the facilities paid for.
Speaker Change: So where you really see a larger effect in reducing our losses in terms of cash flow will be in Q4 and Q1 when Sintas and AbbVie come on board.
Speaker Change: In 25, just the contract manufacturing part, where can gross margins sort of go?
Speaker Change: So, if you segregate out gross margin, we look at a range, and we don't like to give out the exact gross margins, but we look at a range for our Texas facility of between 35 and 45 percent, and at our plant up in Langhorn, 40 to 50 percent on the medical device side.
Speaker Change: So those are the contract manufacturing margins if you are adding people and have to cover the facility costs. But since we're already paying for all the facility costs and all the people,
Speaker Change: We'll have much higher contribution to reduce our losses for every incremental dollar that we see in 2025. So that's why we're kind of feeling bullish about getting cashflow positive.
Speaker Change: That's perfect. And then one more if I may, on Sintas, can you provide any color on sort of the rollout cadence, like number of doors expected or how that how that cadence will roll off the next year?
Speaker Change: Well they distribute to over a million different businesses and it's a pretty wide distribution. We've had some experience
Speaker Change: our second largest or largest customer. And again, as I said, the other real benefit is going to be I'm very excited that people will see Silver Seal in their place of work.
Speaker Change: And if you see it in your place of work and you've burned yourself and you put it on your arm and it feels really good, well, next time you burn yourself at home when you're on Amazon, you know, that's a product you'll know. So, both of those things we think are going to be very valuable to us.
Speaker Change: That's very helpful. And I just want to commend you. I really am happy and appreciate your...
Speaker Change: Your acquisition there is silly, George, and it looks like you sort of caught lightning in a bottle, so congrats on that. Thank you. Thank you. Yeah, sometimes it's good to be a little bit lucky. We had some good upside in that deal when we made it, but it's also good that the product is resonating, and that's fortunate.
We'll take it all.
Thanks George.
Speaker Change: Thank you. And just a final reminder, ladies and gentlemen, any further questions today, please press star 1 at this time, and we'll pause for just one moment.
Speaker Change: And Mr. Levy, it appears we have no further questions this afternoon, so I'd like to turn things back to you for any closing comments.
Adam Levy: Thank you. No, I have no closing comments, just that we're very excited that the products are working and we look forward to Q4, which we think will be even better than Q3.
Speaker Change: Thank you, Mr. Levy. Again, ladies and gentlemen, that will conclude today's NextGel's third quarter 2024 earnings conference call. Again, thanks so much for joining us, everyone, and we wish you all a great evening. Goodbye.
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