Business Overview and History

NEXGEL Inc. (NXGL) is a leading provider of ultra-gentle, high-water-content hydrogel products for healthcare and consumer applications. The company has a rich history of innovation, strategic acquisitions, and diversification that has positioned it as a prominent player in the growing hydrogel market.

NEXGEL was previously known as AquaMed Technologies, Inc. before changing its name in November 2019. The company specializes in the manufacture of custom gels, leveraging proprietary mixing, coating, and cross-linking technologies to produce hydrogels that meet rigorous tolerance specifications. These gels are used in a variety of applications, including wound care, medical diagnostics, transdermal drug delivery, and cosmetics.

NEXGEL's journey began in 2019 when it was founded as a manufacturer of high water content, electron beam cross-linked, aqueous polymer hydrogels. Initially, the company focused solely on contract manufacturing, supplying its gels to third-party companies who incorporated them into their own products. However, in 2020, NEXGEL expanded its business model by launching its own line of branded consumer products and entering the custom and white label opportunities market. This strategic move allowed the company to diversify its revenue streams and capitalize on the growing demand for its innovative gel solutions.

The transition from being solely a contract manufacturer to developing its own branded consumer products presented early challenges for NEXGEL. This shift required significant investment in sales, marketing, and infrastructure to support the new business lines. Additionally, the COVID-19 pandemic in 2020 disrupted NEXGEL's operations and supply chain. However, the company successfully navigated these obstacles and continued to grow both its contract manufacturing and branded consumer divisions.

In March 2023, NEXGEL made a significant move by acquiring a 50% interest in a newly formed joint venture, CGN, for its converting and packaging business. This joint venture expanded the company's offerings, enabling it to reach more customers with a variety of gel shapes and sizes. Shortly after, in January 2023, NEXGEL acquired a 50% interest in another joint venture, Enigma, to pursue branded consumer product retail opportunities and the development of new patch products.

NEXGEL further bolstered its product portfolio in December 2023 with the acquisition of Kenkoderm, a skincare line focused on reducing symptoms associated with psoriasis. This marked the company's first foray into products unrelated to its core gel technology. Building on this momentum, in May 2024, NEXGEL acquired the Silly George brand, a beauty and cosmetics company specializing in eyeliner, fake eyelashes, lash serum, and mascara.

Financial Overview

NEXGEL's financial performance has been impressive, with the company reporting record revenue in recent quarters. For the third quarter of 2024, the company announced revenue of $2.94 million, a remarkable 141% increase year-over-year and a 104% sequential increase. This growth was driven by a 99% sequential increase in branded consumer products and a 103% sequential increase in contract manufacturing.

Gross profit margin for the third quarter of 2024 was 43.6%, a significant improvement from the 28.2% reported in the same period in 2023 and the 28.5% in the previous quarter. The company's ability to expand its gross margins is a testament to its operational efficiency and the success of its diversification strategy.

For the nine months ended September 30, 2024, NEXGEL's total revenue reached $5.65 million, representing an 87.8% increase compared to the same period in 2023. The company's gross profit for this period increased by 326.9% to $1.97 million, reflecting the higher-margin contribution from its branded consumer products.

NEXGEL operates through two main business segments: the NexGel segment and the CGN segment. The NexGel segment, which includes the company's core business and recent acquisitions of Kenkoderm and Silly George, generated $4.38 million in total revenue for the nine months ended September 30, 2024. This revenue was composed of $665,000 from contract manufacturing, $42,000 from custom and white label finished goods, and $3.52 million from branded consumer products. The gross profit for the NexGel segment was $1.88 million, representing a gross margin of 42.9%.

The CGN segment, formed through a joint venture in March 2023, focuses on the company's converting and packaging business. For the nine months ended September 30, 2024, this segment generated $1.27 million in revenue and had a gross profit of $1.17 million, representing an impressive gross margin of 92.1%.

NEXGEL's selling, general, and administrative expenses increased by 75.1% to $4.60 million for the nine-month period, primarily due to higher advertising, marketing, and Amazon fees associated with the growth of the branded consumer products business.

Liquidity

In terms of liquidity, NEXGEL had a cash balance of $1.06 million as of September 30, 2024. The company recently completed a $2 million registered direct offering, with insiders, including members of the management team and Board of Directors, participating. This additional capital will provide NEXGEL with the resources to support its growth initiatives, including inventory expansion and increased marketing for its branded products.

NEXGEL's current ratio stands at 1.51, while its quick ratio is 0.93, indicating a relatively stable short-term financial position. The company has a margin line of credit with a balance of $345,000 as of September 30, 2024, providing additional financial flexibility.

Risks and Outlook

While NEXGEL has demonstrated strong performance, the company is not without its risks. The hydrogel market is highly competitive, and the company faces the challenge of maintaining its technological edge and market share. Additionally, the successful integration and growth of its acquired brands, Kenkoderm and Silly George, will be critical to the company's future success.

Looking ahead, NEXGEL's management expects continued growth across all revenue lines in the fourth quarter of 2024, with revenue projected to exceed $3 million. The company also anticipates achieving positive cash flow from operations during 2025, a significant milestone in its financial journey. This guidance does not include any revenue from the partnership with AbbVie, which is expected to start in Q1 2025, potentially providing an additional growth driver.

NEXGEL's adjusted EBITDA loss narrowed from $788,000 in Q2 2024 to $347,000 in Q3 2024, indicating progress towards the company's goal of becoming cash flow positive. For Q4 2024, NEXGEL expects operating cash flow to continue to improve and approach positive territory.

Conclusion

NEXGEL's transformation from a contract manufacturer to a diversified provider of innovative healthcare and consumer gel solutions has been nothing short of impressive. The company's strategic acquisitions, joint venture partnerships, and focus on branded consumer products have positioned it for long-term success in the rapidly growing hydrogel market. As NEXGEL continues to capitalize on its technological expertise and expand its product portfolio, investors will likely keep a close eye on the company's ability to maintain its growth trajectory and deliver value to shareholders.

The company's recent financial performance, marked by significant revenue growth and improving margins, demonstrates the success of its diversification strategy. With a strong focus on branded consumer products, ongoing research and development efforts, and strategic partnerships such as the upcoming collaboration with AbbVie, NEXGEL appears well-positioned to capitalize on the growing demand for its innovative gel solutions in both healthcare and consumer markets.