Prepared remarks
Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to NEXGEL's Shareholder Update Conference Call. I will now turn the call over to Valter Pinto, Managing Director of KCSA Strategic Communications for introductions. Please go ahead.
Thank you, operator. Good afternoon, and welcome, everyone, to NEXGEL's Shareholder Update Conference Call. I'm joined today by Adam Levy, Chief Executive 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 our filings with the SEC filed periodically. 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.
Thank you, Valter, and thank you, everyone, for joining. On today's call, I will discuss our announcement this morning regarding the closing of our transaction to acquire Celularity's degenerative wound segment. This is a transformational step forward for our company, marking our evolution into a more scalable, diversified medical technology business, tripling our revenue run rate and immediately contributing to profitability. To close on the transaction, we successfully secured capital on more favorable terms led by Sequence LifeScience, a strategic partner with deep expertise in regenerative medicine, manufacturing, development and commercialization. Their lead investment of $5.5 million not only strengthened the financing structure of the transaction, but also aligns us with a partner that enhances our capabilities across all of the aforementioned verticals. The financing was done through convertible notes at a $0.60 conversion price and 50% warrant coverage with a strike price of $0.80. We are excited to announce the formation of a new division, BioNX Surgical, a dedicated division focused on advanced biomaterials for tendon repair, soft tissue reconstruction, bone regeneration and, of course, wound care. The acquired portfolio includes six established regenerative biomaterial products spanning these key areas, positioning us squarely within one of the fastest-growing segments of health care. These are not early-stage assets. They are commercial stage products with more than a decade of clinical use, demonstrated real-world utility and existing reimbursement pathways. These products are already approved in approximately 500 hospitals and represent a large opportunity for BioNX in non-orthopedic surgical specialties. In addition to these commercialized products, there are currently three existing 510(k) devices in our pipeline. These three products have $4.6 million in paid-in capital and are scheduled for 2026, 2027 and 2028. Beyond the products themselves, we are also gaining an experienced commercial and scientific team. This is an important aspect of the transaction as it meaningfully expands our internal capabilities and strengthens our ability to develop and market NEXGEL's own medical devices as well. This transaction will be transformative, not only from a strategic standpoint, but also financially. On a pro forma basis, we expect it to approximately triple our annual revenue to roughly $35 million and be immediately accretive to profitability upon closing. The strategic partnership with Sequence LifeScience is incredibly important to NEXGEL. In addition to providing the crucial capital for us to close on this transaction, Sequence brings an enormous wealth of expertise and skills. Sequence will act as backup manufacturer for the existing products, help us develop new products and aid with distribution channels of their own to further expand our reach. I cannot think of a better partner for the journey we are about to take. Taken together, the acquisition and our strategic partnership with Sequence represents a step change in NEXGEL's trajectory. We are combining a proven hydrogel platform with a portfolio of commercial regenerative products supported by a strategic manufacturing partner, occurring on favorable financing terms. This positions us to accelerate product development, broaden our commercial footprint and pursue new opportunities within the regenerative medicine landscape. Our focus is now on execution and successfully integrating these assets and driving commercial growth. We will continue to build a platform that can generate sustained long-term growth and profitability. With that, I'd like to open the call for questions. Operator?
Questions and answers
We'll take a question from Naz Rahman of Maxim Group.
Congrats on the transaction. I actually have a few. First, I want to clarify the structure of the deal. So you received $5.5 million from your strategic partner, but it looks like you have to pay $8.3 million in total. So was the entire $8.3 million on converting that includes the $5.5 million? Or is it $5.5 million directly in cash and then the remaining being a convert? I just want — could you clarify the transaction also, like you also gave a $5 million note to Celularity, right? Could you clarify all the terms of transaction? I just want to be clear on this.
Sure. Good to hear from you, Naz. There was no note. Basically, we paid $5.3 million at closing to Celularity. And we assumed and are going to pay out the $2.9 million that is owed to the sales reps in back commissions. Those sales reps are then reinvesting some of that back into NEXGEL. Of the $5 million convertible note, we also gave Celularity $5 million of this convertible note. They then gave $2.5 million, or half of that note, to Sequence to settle a pre-existing debt that they had with Sequence. Sequence then wrote a check for $3 million in cash into this deal, thereby bringing their total investment between the debt, the compensation they took for their debt, as well as the cash they wrote directly into NEXGEL to $5.5 million. So it's a little bit — it's kind of like one of those four-way baseball trades, but I hope that explains it for you.
Got it. Okay. So the note, what are the terms of the note? When is it due? And what is the maturity on that note — I mean interest rate, I'm sorry.
Yes. So the note is an 18-month note, and it's a convertible note, and it matures in 18 months. It pays a 10% coupon.
Got it. Okay. So now that you have the transaction closed, how long do you think it will take you to integrate the assets into NEXGEL? And you're saying it will be immediately accretive. But I guess like are you expecting any initial restructuring costs or anything along those lines?
No. What's nice about this transaction is that this was always a separate segment with its own people within Celularity. In fact, they reported as a separate segment. So we took the key people that we wanted from that segment. We sublet some space in the actual same building that Celularity is in. So most of the operations kind of move over seamlessly. What there also is to integrate, however, is some of the synergies. I've been asked, including by you, many times why we don't ever sell SilverSeal or these other medical devices, why we aren't developing them. Because they require a medical sales force, which we never had. So we're looking forward to, because we will now have reach through all the independent sales reps that we're planning on putting on and the ones that are returning to us, to be able to not only fully commercialize these existing products, but the new products in the pipeline as well as some of the NEXGEL products where appropriate within hospitals.
Got it. And just on that point, with the integration of these new products, what do you think happens to the company's gross margins for 2026? And what do you think EBITDA could potentially be in 2026?
So in the case of this company doing the same business that they did last year, our models, if we did $22 million to $23 million, show about $4 million to $4.5 million of EBITDA, assuming that's the number we hit. We were hoping to do better than that. The gross margins are — and I know you and I have had many conversations about NEXGEL's gross margins being complicated because you have both the medical device and the consumer products and now they skew each other. There's a little bit of that within Celularity. So they really have three buckets of margins. There's the lower margin with higher cost-of-goods distributor model, where there's no commissions paid. Then there's the wound care area, which is only about 15% to 20% of the business, where the commissions are modest but there's also a little more margin, but still less. And then there's surgical where the margins are exceptionally good, but the sales commissions can go as high as 30% to 35% to almost 40% sometimes. So when you talk about the blend, we expect to get a contribution margin of roughly 52%, but it's made up of three different components.
Got it. That was helpful. Okay. So Adam, we're also basically past Q1. Could you potentially provide some color on how you think Q1 is going to develop or look like for NEXGEL? Q4 obviously came in relatively light below your guidance. Just curious if you could provide some context on what Q1 is going to look like.
Yes. Q4 was surprisingly light for us. Some of the new products didn't really do what we thought they were going to do. Silly George had sort of a setback quarter, but we're seeing a nice recovery in Q1. We're not going to see a drop off, especially in consumer in Q1. I don't want to get too detailed because we obviously haven't reported it yet. But we're seeing a return to normality in Q1. Q4 seemed to be, on the consumer product side, a little bit of an anomaly for us.
We'll move on to Mike Andrews.
You mentioned in the press release the ongoing development of products as this partnership matures. Where does NexGelRx play in the dynamics of this deal?
It doesn't. NexGelRx is specifically the drug delivery program that was spun out to be developed separately, which includes our apremilast program. So that is a separate spinout that NEXGEL owns 20% of, but has really very little to do with this transaction. It's not affected at all by this transaction.
We'll move next to Brett Derekson.
Congratulations on your purchase. Just a quick question. If you could talk to what the dilutive outstanding shares is going to look like now? And then also when the warrants and the other items come into the strike price, could you talk a little bit about that?
Sure. So if you take basically the conversion price of $0.60 and you also take 50% warrant coverage and assume that all the warrants are going to be exercised, you come up with a formula that for about every $1 million, there's 2.4 million shares. The deal will probably, between the purchase price and a little bit of working capital, be somewhere in the $12 million to $14 million range total raised. So if you do the math, you're somewhere in the 30 million share area. We'll give more details as the rounds close — our filings will certainly, our 8-Ks and everything will lay that out in great detail as soon as we know what the exact numbers are.
We'll move on to David Blocker.
I got a quick question. If you've modeled what you expect the revenue to be like two or three years out?
So this was a business that had scaled all the way up to $50 million as recently as 2024. Celularity ran into some financial challenges and in 2025 did not pay their sales reps. That's why you see in the deal that one of the things that had to come out of proceeds immediately was getting those sales reps back and reengaged. As I said in my opening, these products are approved in over 500 hospitals, and there was nobody walking into them. So it's our job to reinvigorate that, get the sales force working again. We've identified and will soon be hiring a new national sales manager. We hope to get back to that level and beyond, especially with some of the new products. The product that we currently call Project SPARK is a tendon wrap. It will be the first FDA 510(k) constructed out of human tissue. It's made of placental material. The reason placental material has not been used previously extensively for wraps like this is because of the tensile strength. This has about the highest tensile strength on the market. It's thin as a piece of paper. Because it's made of placental material, it has tremendous anti-inflammatory properties. So we think that could be a game changer. We think that product could potentially be a $40 million to $70 million product on its own. That's potential. But we are very excited about the new products, and we think we can get back to close to what they were doing in 2024, hopefully, in that two-year span that you're talking about.
We do have a question from Ves Mahallov.
Adam, I wanted to ask you about the intellectual property being acquired in this transaction. Is NEXGEL going to be paying any royalties to anybody on these products going forward?
So the only royalties — it's a great question. The only royalties are because the new products that we're getting in the pipeline that have the $4.6 million paid-in capital. We have a 5% royalty to Celularity on the SPARK project. We have a 3% royalty on the ORCHID project and a 1% royalty on the FUSE project. That's because they have a lot of money tied up in these. They obviously have the most money tied up in the one that's coming out this year, so that's got a little bit higher royalty. But when you look at the sale price of these products and the margins on these products being surgical products, that's very easy to handle as a low single-digit royalty. And that's it — there's no other royalties.
Do they sunset at any point or for the life of the product?
The royalties do sunset; I believe after seven years.
Okay. Now I wanted to ask you about — I understand that these parts will be accretive to the corporate finances. But in previous conference calls, I think you mentioned that it will make the company profitable on the operating line. Under GAAP financing, let's go into Q2, the first quarter fully integrated, fully reporting under the NEXGEL brand. So the quarter ending in September, under safe harbor and everything else, will this be a profitable company on an operating margin basis or at least an EBITDA basis overall, not just this division, but including the existing business of NEXGEL when you combine them together? What should we expect for the third quarter, the one ending in September?
Right. So our third quarter — you're talking about the second quarter in which we own these products?
I'm talking about the quarter that starts July 1 and ends on September 30.
Yes, our third quarter. Yes. The company will be — on an EBITDA basis for certain will be profitable. Remember, this is a seasonal business. Q1 is generally the weakest. It gets a little stronger in Q2, and Q3 and Q4 is where you kind of make hay, and Q4 particularly is the strongest period. That's because of these new high reimbursement insurance plans. A lot of people wait for these procedures until the end of the year when the reimbursement is better. So Q4, in many historical years, was as big as the rest of the year put together.
But on a rolling 12-month basis, the company should be both EBITDA and operating — EBITDA profitable?
Yes. And that's really one of the things that made this an attractive proposition for us. NEXGEL has made some acquisitions. Each of those acquisitions from CG Labs to Silly George to Kenkoderm is profitable in and of its own right. But the plant is still underutilized and the public company expenses are still considerable. What we really lacked was the ability to scale because this is a very long onboarding process when we talk about NEXGEL's medical device business. This is a nice way for us to accelerate and get enough revenue and volume and scale so that we can immediately become profitable. That was a big motivator in why we did this.
Okay. Next question: when you speak about contribution margin, I get a little confused. For me, contribution margin from my accounting days was the delta in operating margin under GAAP. When you say 52% contribution margin, could you translate that for us? What is the delta or the contribution margin at the operating line under GAAP or at the EBITDA line? So 52% is obviously very high for an EBITDA. Could you clarify what you mean by contribution margin?
Sure. Contribution margin is essentially cost of goods plus commissions and direct sales costs. So it does not include any of the fixed overhead. That's what I consider as being contributed to cover the fixed overhead, which gives you a good way to analyze things. We know we do — we have 52% margin, and we know our fixed costs like payroll and rent are X. We have to do some multiple of revenue to get to where we cover that. After that, we become profitable. So that's what I mean when I say contribution margin.
So COGS, cost of goods sold plus sales commissions. And then what basically goes into corporate overhead and before?
All of the other things — rent, salespeople, we have a fixed overhead that's pretty easy to quantify. It's probably around the $6 million to $6.5 million range. That includes budgets for demonstrations and travel and covers everything else that's below the line in the SG&A line. So the contribution margin really is the gross profit that goes into the SG&A line.
Okay. And last question here. Going forward, will NEXGEL basically have an R&D department for this division such that it develops the new products? When you say we're developing new products, is NEXGEL developing them and retaining the intellectual property? Or is somebody else doing the R&D and then there is some sort of arrangement? Who's going to get the margin from any future R&D performed with these product lines?
The short answer is NEXGEL will, but it's going to be done in a series of different ways. First, this is a great opportunity for NEXGEL to move forward with some programs we had put to the side, like our drape programs and NEXDerm, things we said we couldn't make right now because the only real opportunity was to sell them to somebody else. Now we have a sales force so we can begin to continue to develop those because there's not a lot of cost needed for those. Second is the continued development of the programs that are already in Celularity; those are done within our offices. The space we took has its own development lab. We have a budget built in to continue R&D on those products and continue to get labels on those products. Third, our new strategic partner, Sequence, also develops products. They have a full development team in their facility in San Antonio, and they're excited about combining technologies with us, finding uses for the hydrogel and helping us distribute the hydrogel. They have ideas on how our hydrogels could be used in wound care in the new landscape. So we'll be getting products from multiple different sources.
But at least for these product lines, you're acquiring an R&D team and space. Therefore, any intellectual property developed under NEXGEL's roof remains within NEXGEL?
Yes. We will own, for example, the patents on Project FUSE and Project ORCHID.
And that means, obviously, higher margins go to NEXGEL's shareholders or stakeholders, let's put it that way.
Yes. But again, some of the other products don't have patent protection anymore, like BIOVANCE and Interfyl. These products have been on the market since 2012–2014. What makes them valuable is that they're approved in 500 hospitals, they have great clinical data to support their sale, and they are reimbursed by Blue Cross. That's what really makes those products interesting to us, not patent protection. They're off-patent.
Okay. But my point was if it gets developed under NEXGEL's roof, any future products developed by NEXGEL, there will be no royalties?
100% — our plan is to own the patents ourselves.
And really last question here. You mentioned on a previous conference call that there may be some contemplation about doing a stock buyback provided the company is on solid financial footing and generating cash flow and has some cash on the balance sheet down the road. Do you still believe that may be the case or not?
That depends on circumstances. What's always been critical to us is that when you switch a company to being profitable, it then switches to offense. At that moment, you don't have to do anything because you're making money. If you feel your stock is getting unfairly treated, then it's a time for stock buybacks to protect shareholders and increase their value. If you feel your stock has gotten ahead of itself, sometimes it's good to take a little money off the table. You have the ability to make those decisions on a decision-making basis rather than needing to raise money to stay afloat. That's one of the reasons this transaction is so important. I can't say what the circumstances will be, but yes, a stock buyback would certainly be one of the tools in the toolkit should the right circumstances present themselves.
We'll move on to Robert Gotlieb.
What a great update. A couple of questions. When will the Celularity products start having sales under the NEXGEL banner, the ones that came over? Will it be at the end of the quarter, mid-quarter or earlier?
Yesterday.
Okay. Excellent.
Yes. The effective date was Monday. As of Monday, all sales — remember, these are products that are used in hospitals every day — began to generate revenue.
Okay. And then as you've modeled things out, if you're able to share any — I don't want to put you on the spot for exact predictions — how do you model a middle case versus best case scenario for the convertible note? Do you think the note will be paid back? Do you think the note will be issued as equity? How do you game that out?
If we do well and we're successful and we stay above the conversion price, it would certainly convert and therefore we would not have to pay the money back. If we do poorly and nobody can convert, then we need to find a way to get the money back to the investors. That's why it is critical that we turn profitable, as one of the previous callers said, in Q3 and maintain that profitability because with that strength those things are easy to manage. If something goes horribly wrong, convertible notes can turn ugly. But we have a very high confidence level here. We know the space. When we announced this deal, some market participants clearly didn't like it. There were times we thought about abandoning it. I kept talking to more people and asking what I was missing. Many smart people said they think the market participants were wrong and they liked the deal. Eventually I asked Sequence, and they confirmed they liked this deal and wanted to be involved meaningfully. Sometimes you have to do what you believe is the right call and take an opportunity that's there, and we're pretty confident this is going to turn out very well.
And if it does convert rather than require payment, what other debt is on the books that is of relevance?
None. This is senior secured debt. There's nothing else on the books. NEXGEL never had debt before this.
It basically seems like an acquisition of a commercial line that really places you as a different company than a hydrogel company. It's more of a regenerative medicine company. How do you see the branding working in that regard?
We're branding it as BioNX. The product brand names are already established in terms of BIOVANCE and Interfyl. Those brand names are what doctors and hospitals recognize. The President of Celularity's degenerative wound segment, Dr. Stephen Brigido, is coming over with us and is already on the Scientific Advisory Board; he did the SilverSeal studies. This is kind of what NEXGEL was always thinking about being. We're always going to be a medical device company. The branded consumer side happened because of the pandemic, which led to things that are now profitable and lucrative, and we will continue them. But this is really our roots and core.
Thinking back to synergies you mentioned about other wound care products — I know you mentioned SilverSeal. At the inception of going public there was talk of the NEXDrape program. If you have sales folks selling BioNX products acquired from Celularity, do you see an opportunity to distribute NEXDrape using that same sales force rather than developing it for external sale?
Yes. Whether the independent reps prefer selling it, we have to start talking to them and see which products they think are most viable. So far there has been more interest in NEXDerm because it's an easier sell in hospitals. The goal is to always be in the bag of the reps who carry devices in hospitals because they have access to the entire hospital. Those are the reps we want carrying the biologic. If we can do that, it opens up putting other things in their bag. Now we can say we think it's a good and viable product and try to sell it ourselves. If we sell it really well, maybe we'll sell it later or maybe we'll keep it, but it opens up a lot more opportunities for us.
It appears we have no further questions at this time. This concludes our question-and-answer session as well as our conference call for today. We appreciate your time and participation. You may now disconnect.