NXGL: Steady Growth in Q1 2024 Amid Strategic Investments for the Future

Published on September 24, 2024 | Ticker: NXGLW

NexGel, Inc. (NASDAQ: NXGL) reported its financial results for the first quarter of 2024, showcasing steady year-over-year growth and strategic investments to position the company for significant growth opportunities in 2024 and beyond.

Revenue for the first quarter of 2024 increased by 104% to $1.27 million, exceeding the company's guidance of $1.25 million. This strong top-line performance was driven by growth in both the contract manufacturing and consumer branded product business segments, with revenue increasing by 58% and 178% year-over-year, respectively. Sequentially, total revenue increased by 17%, while the Consumer Branded Products segment increased by 57%, reflecting the first full quarter of revenue contribution from the acquisition of the Kenkoderm brand.

The company's gross profit margin for the first quarter of 2024 was 21.9%, a significant improvement from the negative gross margin of 9.2% in the same period last year and an increase from 14.6% in the fourth quarter of 2023. This margin expansion was primarily due to the increase in higher-margin consumer branded product sales.

"Following a record year of growth in 2023, I'm pleased to report our first quarter financial results that demonstrate steady growth year-over-year and preparedness for significant growth levers we expect in 2024," said Adam Levy, Chief Executive Officer of NexGel.

Business Overview

NexGel is a manufacturer of high water content, electron beam cross-linked, aqueous polymer hydrogels, or gels, used for wound care, medical diagnostics, transdermal drug delivery, and cosmetics. The company specializes in custom gels by capitalizing on proprietary manufacturing technologies.

Historically, NexGel has served as a contract manufacturer, supplying its gels to third parties who incorporate them into their own products. In 2020, the company launched its own line of branded consumer products and expanded into custom and white label opportunities, which focus on combining its gels with proprietary branded products and white label offerings.

All of NexGel's gel products are manufactured using proprietary and non-proprietary mixing, coating, and cross-linking technologies, enabling the company to produce gels that can satisfy rigid tolerance specifications while maintaining product integrity. Additionally, NexGel has the manufacturing ability to offer broad choices in the selection of liners onto which the gels are coated, allowing the company and its customers to determine tolerances in moisture vapor transmission rate and active ingredient release rates while personalizing color and texture.

In December 2023, the company expanded its product portfolio to include the Kenkoderm brand, a skincare line focused on reducing symptoms associated with psoriasis. Kenkoderm products do not utilize NexGel's gel technology and are manufactured by third parties.

Strategic Investments for Future Growth

During the first quarter of 2024, NexGel made strategic investments to support the company's future growth initiatives. This included capacity expansion at the company's CG Converting and Packaging facility in Texas, as well as investments in preparations for meeting European compliance requirements.

The expansion of the CG Converting and Packaging facility is expected to double the existing square footage, providing the necessary capacity to support the increased demand the company anticipates this year. NexGel invested $152,000 in CapEx during the quarter for state-of-the-art automated machinery and related clean room facilities to support this expansion.

Additionally, the company continued to invest in the process of attaining Medical Device Regulation (MDR) compliance, which will allow NexGel to sell its Class I devices in the European market. Costs associated with MDR compliance totaled $102,000 in the first quarter. Achieving this certification is a crucial step for the company's long-term growth, as it provides access to the European market through partnerships with STADA and other potential distributors.

"While we continue on our path of steady growth year-over-year, both in branded sales and contract manufacturing, we are also investing in future growth of the business," said Levy. "Our investments made during the quarter were twofold: capacity expansion in our converting and packaging facility in Texas, and the final investments in preparations for meeting European compliance requirements."

Financials

For the first quarter of 2024, NexGel reported revenue of $1.27 million, an increase of 104% compared to $620,000 in the same period last year. Gross profit for the quarter was $277,000, compared to a gross loss of $57,000 in the first quarter of 2023. The company's gross profit margin was 21.9% in the first quarter of 2024, compared to a negative gross margin of 9.2% in the same period last year and 14.6% in the fourth quarter of 2023.

Selling, general, and administrative expenses increased by 43.8% to $1.1 million in the first quarter of 2024, compared to $797,000 in the same period last year. This increase was primarily attributable to higher advertising, marketing, and Amazon fees, as well as increased professional and consulting fees.

Research and development expenses decreased by $27,000 to $2,000 in the first quarter of 2024, from $29,000 in the same period last year.

Net loss for the first quarter of 2024 was $905,000, compared to a net loss of $807,000 in the first quarter of 2023.

As of March 31, 2024, the company had a cash balance of $2.4 million, which included net proceeds of approximately $1 million from a registered direct offering led by insiders in February 2024.

Liquidity

NexGel used $1.1 million in cash from operating activities during the first quarter of 2024, compared to $709,000 in the same period last year. The increase in cash used in operations was primarily due to strategic investments made during the quarter, including capacity expansion and preparations for European compliance.

The company generated $929,000 in cash from financing activities in the first quarter of 2024, primarily from the registered direct offering, which was offset by principal payments on notes payable and financing leases.

"I feel very comfortable with the runway of cash we have on hand to fund our operations going forward," said Levy.

Outlook

Looking ahead, NexGel is well-positioned for significant growth opportunities in 2024 and beyond. The company's strategic investments in capacity expansion and European compliance will support its ability to meet the anticipated increase in demand for its products.

In the Branded Consumer Products segment, NexGel currently has 31 health and beauty products sold direct-to-consumer and several growth strategies in place, including expanding its retail presence in North America and eventually entering the European market.

The company's partnership with AbbVie as the exclusive supplier of gel pads for their RESONIC Rapid Acoustic Pulse device for reduced cellulite appearance is also expected to contribute to growth, with the device launch still targeted for the end of 2024.

"We are investing in future growth of the business, and I'm pleased with the progress we've made in the first quarter of 2024," said Levy. "We believe we have the right strategies in place to capitalize on the significant growth opportunities ahead of us."

Risks and Challenges

While NexGel has demonstrated steady growth and strategic investments for the future, the company faces several risks and challenges that investors should consider:

Continued profitability and cash flow generation: The company has reported net losses and negative operating cash flows in recent periods, which could impact its ability to fund future growth initiatives.

Regulatory compliance: Achieving and maintaining regulatory approvals, such as the European MDR certification, is critical for the company's expansion plans but can be time-consuming and costly.
Competition: The hydrogel and skincare markets are competitive, and NexGel faces competition from larger, well-established players.
Reliance on key customers: A significant portion of the company's revenue is derived from a limited number of large customers, which could pose risks if these relationships were to change.

Conclusion

Overall, NexGel's first quarter 2024 results demonstrate steady growth and the company's commitment to strategic investments for the future. As the company continues to execute on its growth strategies, investors should closely monitor the company's ability to achieve profitability, navigate regulatory hurdles, and diversify its customer base.

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