Operator: Good afternoon, I will be your conference operator today. At this time, I would like to welcome everyone to NEXGEL Incorporated’s Second 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.

Valter Pinto: Thank you, operator. Good afternoon, and welcome, everyone, to NEXGEL’s Second 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, 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 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.

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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.

Adam Levy: Thank you, Walter, and thank you, everyone, for joining us today to discuss our second quarter 2023 financial and operating results. For the second quarter of 2023, we reported record revenue of $1.17 million, an increase of 108% year-over-year that exceeded our guidance. This substantial year-over-year growth reflects sales growth in both our contract manufacturing and branded consumer products. Our contract manufacturing line of business increased 174% year-over-year mainly due to the full quarter contribution of our newly formed joint venture, CG Converting and Packaging, as well as an increase from our existing core customers. On the branded consumer side, this was our best quarter ever, reflecting strong sales within the Amazon Marketplace.

New and existing direct-to-consumer branded products continued to perform well during the quarter, increasing sales by 44% year-over-year. SilverSeal has become a hero product for us and continues to gain popularity and the reviews are very positive. This product is a unique hydrogel dressing for wounds and burns. These sterile silver patches are FDA cleared and have been clinically shown to kill 99% of staph, MRSA and strep. They’ve also been shown to reduce scarring and wounds. SilverSeal was a behind-the-counter hospital device for many years, and our messaging of hospital-grade product now available for home use has resonated well with consumers. In the coming months, we will be seeking to expand SilverSeal’s distribution into retail and other territories.

We’ve already begun the process to obtain a CE mark as we have interest already from potential partners in Europe. For the second quarter, we reported gross profit of $175,000 versus a gross loss of $57,000 in Q1 of 2023. The second quarter included enhanced amounts of promotional materials, customer product samples and other marketing materials to support our new product line launches. We don’t expect these costs to recur in the third and fourth quarter, therefore, we expect our margins to continue to improve in the second half of the year. Our net loss for the quarter was $695,000, down from $814,000 in the first quarter of this year. The improvement in the quarterly loss is attributable to our strong top line growth and the inclusion of a full quarter of CG Converting and Packaging.

Our cash and cash equivalent balance, when you include marketable securities decreased from $5.8 million as of March 31, 2023, to $4.3 million at June 30, 2023. The delta between our improved net loss during the quarter and the net cash decrease period-over-period was related to an increase in accounts receivables, increased prepaids and other current assets and capital equipment investments. First, the customers of CG Converting and Packaging require lengthier payment terms, as their payment terms are closer to 90 days as compared to NEXGEL’s customers who typically receive 30-day payment terms. Therefore, our accounts receivable increased during the quarter by $570,000 to $950,000 total. Prepaid and other current assets increased by $238,000 in the second quarter to $366,000.

In 2023, we eliminated the financing of our insurance policies and other higher interest items that we had historically financed, thereby saving the cost of the related interest expense. We also invested an additional $168,000 in property, plant and equipment at NEXGEL in anticipation of future increased customer demand. Taking into account the investments we made, we ended the quarter with $4.3 million in cash, which continues to provide us with sufficient cash runway to operate and invest in accelerating our growth going forward. Our second quarter results were our first full quarter with CG Converting and Packaging. We have already begun to realize the benefits of this joint venture and has contributed materially to our top line growth and is accretive to the bottom line as well.

These benefits will only increase once the planned expansion, installation and validation of the new equipment is complete. Our Q2 results did not include any sales for our new amblyopia patch due to supply chain delays. We have now received all of the materials and we’ll be shipping our initial orders this month. We will have early results on adoption in Q3. More recently, in July, we announced a new strategic relationship with Enigma Health, a joint venture company for retail distribution and marketing services in North America. Now that we have fully vetted the audience for our leading products and have gained steady traction in the market, it is time to put these products on shelves. Enigma’s leadership includes Joe Magnacca, an extinct leader, who has served in multiple executive roles, including CEO of Massage Envy; President of Walgreens; and President of Duane Reade.

It also includes George Lamont, a 30-year plus executive with experience in strategic food, drug brokerage sales and marketing. We are excited to leverage the expertise and market presence of Enigma Health’s management team to expedite the delivery of our cutting-edge hydrogel patches directly to consumers. Joe and George are experts and will be great partners for us. We are actively speaking with many leading retailers and expect to have more news on the progress of our roll-out throughout the remainder of the year. Now, halfway through Q3, we are pleased with the trending of our branded products. The sequential growth trend we saw in the first half of the year has continued into the current third quarter. We had a very strong July and the first two weeks of August, and we see continued growth on all of our products on Amazon.

We are also continuing to see good sales momentum in contract manufacturing. In closing, we believe in our ability to attract new customers to both NEXGEL and CG Converting and Packaging in the second half of 2023, and we believe that we are well positioned for long-term growth. With that, I would like to turn the call over to our CFO, Adam Drapczuk. Adam?

Adam Drapczuk: Thank you, Adam. Today, I’ll review financial highlights of our second quarter 2023 results. For the second quarter of 2023, as Adam mentioned, revenue totaled $1,170 million, an increase of $606,000 or 108% as compared to $561,000 in the second quarter of 2022. This growth was primarily due to sales growth in contract manufacturing of 174% and branded products of 44% year-over-year. On the branded consumer side, this was our best quarter ever, reflecting strong sales on Amazon. Revenue for Q2 also included a full quarter contribution from the newly formed joint venture, CG Converting and Packaging. In the second quarter of 2023, branded product revenue was 22% versus 76% for contract manufacturing revenue. Cost of revenues was $992,000 for the quarter ended June 30, 2023, compared to $460,000 for the quarter ended June 30, 2022.

The increase in cost of revenues is primarily aligned with the increase in revenues, that would include some costs related to increased marketing efforts that will not be recurring. Gross profit for the second quarter of 2023 was $175,000 compared to a gross profit of $101,000 for the same period in 2022. Gross profit margin for the second quarter was 15% compared to a gross margin of 18% for the second quarter of 2022. The increase in gross profit was mainly due to a higher level of contract manufacturing sales against fixed costs, partially offset by higher manufacturing labor costs. Total operating expenses, including R&D and SG&A expenses, increased to $937,000 for the three months ended June 30, 2023, compared to $819,000 for the prior year period.

The year-over-year increase was primarily attributable to increased advertising, marketing and Amazon selling fees, which support our increase in branded revenue, as well as higher compensation and benefit expenses. Research and development expenses decreased by $56,000 to $55,000 for the three months ended June 30, 2023, from $111,000 for the three months ended June 30, 2022. Net loss for the quarter ended June 30, 2023, improved to $695,000 or $0.12 per basic and diluted share, compared to a net loss of $1 million or $0.19 per basic and diluted share for the same period last year. As of June 30, 2023, NEXGEL consolidated had approximately $4.3 million of cash and cash equivalents and marketable securities. During the quarter, the company invested in new equipment to increase its capacity at manufacturing facility in anticipation of increased demand in contract manufacturing during the second half of 2023.

As of June 30, 2023, NEXGEL had 5,696,064 shares of common stock outstanding. I would now like to open the call for questions. Operator?

Operator:

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Q2 2023

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