Nanophase Techs Corp

Ladies and gentlemen, thank you for standing by and welcome to the Nanophase third quarter 2021 financial conference call. At this time, all participants lines are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Jez Genachowski, President and CEO. Thank you. Please go ahead.

Thank you, Michelle. Good morning to all of those listening live, and welcome to those who choose to listen later online. I'm glad you could join us for our third quarter investor call. Today's discussion will cover current results, the current state of the business, and our plans for 2022. Kevin Keraton, our Chief Operating Officer, will be joining me today on the call. It's hard not to be excited about our progress in 2021. Our strategy, our investment of time, focus, and financial resources have helped us to finally achieve our longstanding goal of becoming an exciting company. We've brought our companies to the point where business development and sales growth are not our biggest challenges anymore. The markets want what we've developed, and we continue to see demand grow through 2022 and beyond. I invite you to contemplate something. The greatest challenges we're facing today involve enhancing and expanding capacity, managing working capital, and adding top people to our team. These are addressable challenges that fall in with those that all fast growing businesses deal with. There are known ways to solve these things and they involve a degree of patience, proper management of financial resources, and applying known solutions. What a great spot to be in. Over the past two years, there hasn't been any appreciable slowing of the trends we've been seeing toward broader consumer acceptance of and demand for minerals-based skin health products. We remain optimistic about the future of our Celestin's finished products business and about the growing demand for minerals-based products and ingredients generally. Before I expand on this, let's cover some numbers. Unless identified otherwise, all numbers will be stated in approximate terms. Our Q3 2021 revenue was $7.9 million, up 104% or $4 million when compared to the record revenue of $3.9 million for the same period last year. Nine-month 2021 revenue was up 80%, topping $22 million compared with then-record revenue of $12 million for the same period in 2020. For the third quarter of 21, earnings were $1.4 million or $0.03 per share. This was up $900,000 or $0.02 per share quarter over quarter. For the nine months in 21, earnings were $2.7 million, coming in at $0.06 per share, representing an increase of $1.9 million, or $0.04 per share, over nine-month 2020 numbers. 2020 may not have been that long ago, but we're a different company today. We now have a multiple. Celestin's products are still the driving force behind our growth, and I'll start there. We've had $13.4 million in Celestin's sales for the first nine months of 21. compared to $6.7 million for all of 2020 and $1.9 million for 2019. I'll leave it to Kevin to discuss specifics on what's been driving our cell essence growth and how we plan to expand it by continuing to develop new products and new customers a bit later in the call. Our personal care ingredient sales, which we often refer to as active pharmaceutical ingredients, or APIs, have seen nice growth so far in 21, and we expect growth to continue in 22. We had 5.3 million in API sales for the first nine months of 21, compared to 4.2 million for the same period in 2020. APIs are still an important part of our business. We expect solid Q4 volume, then we think we'll get back to the $8 to $9 million annual range in 2022. Before we discuss medical diagnostics and life sciences, the third strategic part of our business, I wanted to take a few minutes to explain the macro environment driving the growth, both in our Solessence business and now of our API or ingredients business. While the two areas are very different in terms of our customer base and our growth expectations, many of the same forces are fundamental to our value in both markets. Nanophase and Solessence are companies that have pioneered the use of zinc oxide as not only safe, but also aesthetically pleasing alternatives to chemicals-based products. The markets we serve have seen minerals-based sun and skin health products, driven largely by zinc oxide as the critical API, continue to see good demand growth. Minerals have dominated growth in both active and daily wear sunscreens, in leisure wear and cosmetics. They've also proven to be a bright spot for the prestige cosmetics markets. Consumers want comfortable and safer ways to look great and to protect their skin from environmental damage, much of which comes from the sun's rays. Regarding our plan for Solessence, we saw record growth in sales throughout the COVID-19 pandemic. We like where we position ourselves and feel great about our strategy. In addition to the high quality of our products and their good performance in protecting and enhancing skin health, the series of external things happening in the marketplace continues to help us expand our product advantages. You may recall that over the past several years now, some of the most common chemical sunscreens have been banned, due to their environmental impacts. They are not considered safe for use near coral reefs. Many of our downstream API customers and all of our Solescence customers have seen that consumers everywhere, landlocked or seaside, have drawn their own conclusions. They don't like the thought of endangering themselves or the environment. Additionally, the Food and Drug Administration's pronouncements on sunscreen API safety The first proposal to review these ingredients in decades continued to pressure the industry to either prove the safety of chemical sunscreens or eventually withdraw them from the market. There were 16 active ingredients listed in what the FDA calls the monograph, or the list of active ingredients allowed to be used in human sun care in the United States. Of the 14 chemicals-based APIs on this list, the FDA has declared two of these ingredients unsafe for humans, and the other 12 to require much more data to be submitted to prove them safe for use on humans. Combined, those 14 active ingredients represent all of the APIs currently allowed in the monograph in the class that we refer to as being chemicals-based. They also represent our most significant market competition, and they make up 14 out of the 16 total ingredients included in the monograph. Zinc oxide and titanium dioxide, the two remaining options in the current monograph, are the only two that the FDA has deemed to be safe for human use. Both are the only minerals-based APIs. That's what we make, that's what people want, and that's what we sell. While the industry is pushing back, the FDA has gone to atypical lengths to hold the chemicals-based manufacturers accountable. They need to prove that their products are safe or pull them from the market. This will continue to unfold over the next few years, and we expect this to continue to be a positive for us in the marketplace. Regardless of the near-term FDA outcome, consumers have been listening to all of this and reacting to it. Many have decided they aren't going to wait on the FDA, so they're demanding more minerals-based products on their own. We're in a great spot to take advantage of what we think will be a growing, then possibly permanent shift in these markets. Moving on to our third and final strategic area of focus, Medical diagnostics and related life science applications comprise this part of our business. These sales reside in our advanced materials product category. This category also includes all of our legacy products for architectural coatings, surface treatment, and polishing. We had 3.4 million in advanced materials sales for the first nine months of 2021, compared to 3.7 million for the same period in 2020. The great majority of sales in this category represent medical diagnostics. The COVID-19 pandemic greatly accelerated our sales in this space during 2020 and for the first half of 2021. We saw a drop-off in medical diagnostics ingredient sales for Q3 of this year and do not expect any significant sales in Q4. While we don't expect near-term demand to reach the same levels as we've seen over the last couple of years, we do expect demand in this area to continue to exceed historic levels, which prior to 2020 were generally in the sub $1 million range annually. We also believe that the type of testing our major medical diagnostics customer does, called polymerase chain reaction or commonly PCR testing, has become a critical use of our technology in the life science space. It is our view that the current expanded testing environment, regardless of the specific virus to be targeted, signals a trend toward greater acceptance of this practice of testing as a normal part of our lives. While it's difficult to predict to what extent COVID specific demand will impact growth in this area going forward, we've demonstrated some important things with our ingredients here. We believe that our deep expertise in material science has created advantages that enable performance in certain tests that may not be achievable through other materials. This is why we've elevated our development in this area to become our third major strategic focus. To recap, These three strategic areas are in order of expected near- to mid-term growth, so lessens fully formulated products, active pharmaceutical ingredients for sun and skin care, and medical diagnostics ingredients. While we still sell some legacy products in the architectural coatings and polishing space, these volumes are relatively low, and we're not doing any further product or market development in this area. We're about skin health products and ingredients and medical diagnostics. These are the areas where we see the greatest demand and the areas where we believe we offer the greatest value. Now, I'd like to introduce Kevin Curitan, our Chief Operating Officer, to discuss progress in these strategic areas and its drivers in more detail.

Thanks, Jess. As Jess has already noted, it's been a long time since we've had an opportunity to speak with you all. and we are pleased to be able to bring such good news to our investor community. Before I begin my brief remarks to hopefully allow sufficient time for what we are sure to be lots of questions, I would like to highlight the tireless work of our teams here at Nanophase. The work of the people employed by our company has been nothing short of remarkable. Given the dramatic turnaround our company has achieved during the greatest health crisis the world has experienced in over 100 years. We invested heavily in policies and procedures to ensure their health and safety, and in return, our team delivered best-in-class technologies that helped underpin the clean beauty movement, large volumes of materials that helped to diagnose COVID-19, and as a result of all of these efforts, record revenue growth and profitability. We thank this talented group of people and continue to be excited about what we will collectively create in the future. Just already indicated, the primary driver of our growth has been our transformation as a leading provider of skin health products. Skin health, by the way, includes both our active pharmaceutical ingredients and the solescence businesses. While much of what I will comment on today is focused on our solescence business strategy, As Jess mentioned, some of the same market forces that help drive Celestins are also helping to grow the API business as well. I would also like to point out that what we've been able to accomplish in the last two years was in no small part really underpinned by being a producer of GMP bulk drugs over the last 20 years. Thus, we've been able to leverage our investments that we've been making in this business over the past. Now on to the Celestin strategy. The strategy we formulated over four years ago is crystallized in our company's vision, which is to enhance people's lives through healthy skin. We knew there were a few challenges in translating that vision into products and ultimately profit, so we further refined our vision into three core tenants to how we would approach this business. The first of our core tenants is to build sustainable differentiation. For us, this means creating patentable technologies that address skin health issues in a manner that enables the creation of finished products with highly desirable consumer benefits and features. The foundation of our growth is a combination of mineral and plant-based technologies that enable us to formulate best-in-class skin care and color cosmetics with high SPF protection. Our technology goes beyond SPF, however, to also provide protection against other environmental aggressors that compromise skin health, such as pollution and blue light. The second tenet was for Nanophase to be the company building these products instead of supplying materials. This allowed us to shorten the time to market and be able to grab a much larger share of the value chain. We also knew that by building the products ourselves, we would have direct and intimate contact with the companies that are making the decisions about what actually reaches the consumers, the brands. This would also allow us to have greater control of our business destiny. Because of the strength of our technology, our talented formulators are able to emphasize the creation of aesthetically beautiful products, products that are a pleasure to wear again and again, while enabling our brand partners to have novel patent protected claims. As a result, our brand partners are able to achieve leading positions in the beauty market and are growing at well above the rate of the beauty market as a whole. The final of our third tenant was to create a path for our clients, or as we prefer to call them, brand partners, to be able to rapidly bring these novel, beautiful products to market. It is often stated that bringing OTC products like we make to market is expensive and time-consuming, that it's hard. Well, we determined that we had the ability to make what is hard easy and therefore invested early on in creating a line of white-label products that serve as the foundation for rapid prototyping and the development of new products and formulas, enabling some of our clients to get to market in less than six months. Getting to market in less than six months is about a third of the time it typically takes to launch a new skincare or color cosmetics product containing SPF. These three tenets, technology-based differentiation, product supply rather than material supply, and enabling the rapid launch of best-in-class beauty products have served as the guideposts for how we allocated our resources and where we invest. Again, our talented and capable team has been the underpinning for this strategy and the wonderful results we have seen and will see in the future. They embrace collaborative work to solve problems that in the past were bigger than our company, with the idea that we all do better when we all do better, a quote from the late Senator Paul Wellstone as the call to action. In closing, as I mentioned in the press release, our ability to lead isn't just about clean beauty, it's also about the ability to bring these wonderful clean beauty solutions to a diverse audience. People of all age groups, all ways that they identify themselves, all skin types, and all skin tones. We, with our brand partners, are proud that we have successfully brought and will continue to bring the best in class skin health solutions to anyone and everyone who wants to enjoy these great products and enhance their lives through healthy skin. Now I'd like to hand things back over to Jess for some closing comments before we begin today's Q&A session. Jess?