Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to NEXGEL's Third Quarter 2023 Earnings 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 the NEXGEL Third Quarter 2023 Earnings Conference Call. I'm joined today by Adam Levy, Chief Executive Officer; Adam Drapczuk, Chief Financial Officer of NEXGEL. 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. 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'll 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.

Thank you, Valter, and thank you, everyone, for joining us today to discuss our third quarter 2023 financial and operating results. We are pleased to deliver yet another record revenue quarter in Q3 of $1.22 million, an increase of 115% year-over-year and up slightly as compared to revenue of $1.17 million for the second quarter of 2023. Of note, the $2.3 million in revenue generated in the last 2 quarters exceeds our full year of 2022 revenue. Growth year-over-year was driven by an increase in contract manufacturing. This is our second consecutive quarter of revenue contribution from the acquisition of a 50% interest in the JV with CG Labs. The return on this $500,000 investment into the JV, which we recently made the last payment on has proved to be an excellent mutually beneficial transaction and 1 in which we have quickly realized the benefits. It has contributed materially to our top line growth and is accretive to the bottom line as well. We also have yet to realize the full benefits to margins as that will come as the new equipment is installed and validated. We expect the first equipment to come online in Q1 of 2024. We recently announced executing the supply agreement with AbbVie to be the supplier of gel pads for their Rapid Acoustic Pulse device. In December of 2021, AbbVie acquired the owner of this technology, Soliton, for $550 million in cash after its RESONIC device demonstrated significant improvement in the appearance of cellulite. After extensive due diligence from AbbVie for many months, our hydrogels were chosen as the required razor to its razor blade model for each procedure to be done. Our ability to meet the high standards of AbbVie demonstrates the uniqueness of our technology and the fact that a company of their…

Thank you, Adam. Today, I'll review financial highlights of our third quarter 2023 results. For the third quarter of 2023, revenue totaled $1.22 million, an increase of $653,000 or 115% as compared to $568,000 for the same period the year prior. The quarterly increase in overall revenues was primarily due to sales growth in contract manufacturing and branded products year-over-year, including revenue contribution from the joint venture formed with CG Labs. Gross profit for the third quarter of 2023 was $344,000 compared to a gross profit of $148,000 for the same prior year period. Gross profit margin for the third quarter of 2023 was 28.2% compared to 26.1% for the same period the year before. Gross margin increased sequentially to 28.2% during the third quarter of 2023 as compared to 15% during the second quarter of 2023. Total operating expenses including R&D and SG&A expenses, decreased to $956,000 for the 3 months ended September 30, 2023, compared to $1.19 million for the prior year period. The year-over-year decrease was attributable to a decrease in total SG&A and R&D expenses period-over-period. Net loss for the quarter ended September 30, 2023, improved to $552,000 or $0.10 per basic and diluted share compared to net loss of $1.2 million or $0.22 per basic and diluted share for the same period in 2022. Net loss also improved sequentially to $552,000 during the third quarter of 2023 as compared to $695,000 during the second quarter of 2023. As of September 30, 2023, NEXGEL had approximately $3.3 million of cash. During the quarter, the company invested in capital expenditures for new equipment and increased its capacity at the Texas facility to prepare us to execute our new supply agreements in 2024. As of November 13, 2023, NEXGEL had 5,717,629 shares of common stock outstanding. I would now like to open the call for questions. Operator?

[Operator Instructions] Our first question comes from Naz Rahman with Maxim Group.

Congratulations on the progress. I have a few. If I could start -- on the supply agreement with AbbVie for the RESONIC product, could you talk a little bit more about the market opportunity and the potential economics to NEXGEL in '24?

Sure. Nav, good to hear from you again. So look, we're under NDA with AbbVie. So I can't obviously share their forecast. We're obviously not in control of their launch. But I can say that you really couldn't ask for a much better partner in a product like this. And I can say that if they are successful, this is extremely significant and impactful revenue for us.

Got it. And on kind of a similar note, you also signed a deal with Haleon earlier this year for a product launch by them. Do you have any updates on the product? Or do you have any potential time lines on when we could hear more about the product itself and a potential launch?

Yes. That product is actually a little bit further off than the AbbVie product. So think about that for -- or certainly an update somewhere in mid '24 as they are probably targeting the end of '24 has always been kind of our guidance on that product.

Got it. That's helpful. So on those 2 points, now more of like a high-level strategic question I've had and then had conversations about is -- you obviously had a very, very transformative 2023, and you have a lot of different initiatives going on. Based on internal thinking and with everything that's happened, what do you think it's like the most significant or potential strategic growth driver, at least in '24?

Unquestionably, it's probably AbbVie. There's going to be some other good things, but that 1 is staring us right in the face.

Got it. Do you have any thoughts on how much of that revenue -- how much of your revenue that AbbVie could compromise?

Again, look, the -- this is -- it will be very significant, we think. They paid more than $0.5 billion, $550 million for this product. I can't imagine they're going to go out. And again, I don't have any direct knowledge, and I'm under NDA, but I can't imagine they're going to go out week with that kind of investment. So if that -- if they really do the job that we think they can do on that product, that is, by far, the biggest opportunity we have.

Understood. On the prepared remarks, you commented a little about the amblyopia patch launch. Could you provide more color on what feedback you got from physicians regarding the patch. And I was also curious in terms of the actual use of the patch, have you found that they're being mainly given to, I guess, new patients or switches. And do you have any idea of how many patients are either new or which is like in terms of percentages?

So great question. So as far as so far, the feedback has been terrific. Generally, they're being given to existing patients because the patients with the worst irritation and the worst issues are the ones that were using a different patch. The children are complaining. They've got those red rings around their eyes that are either blistering or were very irritated. So those are who I think the doctors are giving it to first and foremost, and then they're going to offer it to other people. And as the practice goes through, patients come in every month to get a different set in. They seem to be now steadily reordering and steadily giving it to more and more patients. I think what we need to understand and don't have the full picture of yet, is exactly what percentage of their patients are going to switch to this, right? It's a slight premium or a significant premium. Actually, it's about 50% more expensive than something else you can buy on Amazon. And I think what we need to determine is if everybody just going to like it because it feels so much better or are really the patients that are going to use it the ones with the worst eye irritations and the worst problems. And that, of course, defines the size of the market. So getting a lot of feedback from the doctors. We're doing a lot of research. We're talking to some of the patients that want to tell us some great stories. And as we determine what our next step should be, that will kind of tell us where we should put our resources and how we should really try to ramp this thing.

That was helpful. And also on that point on amblyopia, have you gotten any inquiries for potentially very large wholesale orders beyond the initial orders or reorders.

So no, I mean, we've gotten some large practice orders, practices that have ordered 100 boxes at a time but those are still small in the overall scheme of things until you get a lot of practices. I don't think we're quite ready yet, and that's part of what we're trying to determine before we engage 1 of those more expensive like professional sales forces that might go out to a whole bunch of doctors' offices. We want to understand our product, understand the pitch understand what we're doing because that's not cheap to engage someone like that. But when we're ready, that is definitely 1 of the things that we will talk about and make a plan around.

Understood. So obviously, you have a lot of initiatives ongoing and very meeting near-term initiatives. But I also -- I also want to talk a little bit about your pipeline. Could you provide a potential update on the progress and development of the 510(k) devices you're working on?

Sure, sure. So the main thing that we had for the 510(k) devices that pushed them off was our inability to at scale and at an effective manufacturing cost to produce them with the dies and pumps that we currently have. We have tested the new prototype dive. They worked very, very well, and we’re now going ahead and ordering those guys to come in. And so we’re probably going to be ready to manufacture product in the next 60 to 90 days, and then we will submit it for testing and start moving those products forward again. Fortunately, for us, despite that delay, we’ve had so much to work on that that’s only 1 project out of several. But we do think it’s an important project, and we are going to pick it back up as soon as we can manufacture it effectively.

[Operator Instructions] Our next question comes from Chris Michalski [ph]

Congratulations on very good results.

Thank you, Chris.

So during the LD Micro conference, you said that you wouldn't need any additional cash to reach profitability next year given this quarter's cash yields? Are you -- do you still confirm this statement?

Yes. So we are not going to need any cash to reach profitability. But I've also always said that if an opportunity presented itself or there was something accretive that we could purchase that we would, at that point, do a financing tied directly to that. So as of right now, our cash loss was well below $500,000, and we still have $3.3 million. Fortunately, when you're ramping with some of these bigger companies that we now have, you're not dealing with payment terms like when you go into retail. So I think we're going to be okay right now. We're projecting profitability before we run out of cash with a pretty good cushion. But if there is something that we need to do, and it means that, that's going to allow us to scale and not have a hiccup in the way we scale at that point, we will think about adding some cash. But as of right now, unless there's a really good reason that we're going to announce at the same time, we don't need any cash.

Okay. This is very good to hear. So congratulations on great growth in SilverSeal -- and if I heard you correctly, SilverSeal had very good sequential growth as well as annual. And was there any part of your business that struck sequentially because sequentially, your revenue did not grow that much.

Sequentially, revenues did not grow that much, but SilverSeal grew. We always have a couple of products that you get rid of that didn't work out. So when you're launching a new product, especially when we test our products on Amazon, which is our model, those products will have a very high advertising rate compared to the profitability. So they're really not profitable as you start acquiring various customers. And then what we do is we watch the overall advertising drop if the product is popular because you get reorders, you get subscribed and saves. And then you have to get to a certain threshold, which is probably around 25% to 30% tacos and our heroes are much lower than that, but then the products seem to be scaling. We every -- all the time, not every product we put out works, we're dropping products that don't meet that criteria. So yes, there's a few products that we drop. That's part of the weeding and calling process. But the real growth in SilverSeal is no longer going to come from sequential growth on Amazon because that's a limited market. The next step for us is going to be retail and foreign markets, and that's what's coming in the near future.

Okay. And the retail as you said it's going to be sometime next year.

Yes. I think it's reasonable to think mid-summer, around that time. It's just the process that retailers go through. All of our meetings have gone extremely well. There's a lot of interest on several products, not just Silver Seal because we have probably 3 to 4 hero products now that we think would be viable at retail. And as I get a clearer picture, we'll give you updates on the next quarterly call as to exactly when we think we'll have products in the marketplace.

Okay. And it seems that at least financially, it seems that you fit the profile of a company undergoing strong sequential growth. Your accounts receivable growing, you're investing more money in inventory. So any comments for Q4? Or are we going to see sequential growth again?

We really don't give guidance as to the quarters. I will tell you that you're going to continue to see very strong growth from us. But remember, we also had very large customers that tend to kick in periodically. So it doesn't look like a straight line up, like a flat hill, it looks more like a staircase. So it is always possible that you have a flat quarter, we kind of had a flat quarter this quarter. But then as new things are announced and new customers come online, you'll see large jumps. And that's kind of the pattern I think you can kind of take as a general description going forward. Does that make sense?

Yes. Yes.

[Operator Instructions] We have reached the end of our question-and-answer session. This concludes today's teleconference. Thank you for your participation. You may disconnect your lines now.