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?

Thanks, Kevin. It bears repeating that your company, our company, has reached the point we're working on expanding capacity and tightening up our operations and logistics. These are the things that, while certainly not easy, are neither a mystery, nor are they in areas where we lack experience or where such experience is unavailable outside of nanophase and coalescence. Sure, we're in a tough employment market, but we're not looking for a unicorn to make nanophase and coalescence take off. We have developed some amazing and marketable technologies and have demonstrated the rare ability to successfully commercialize them. That was the hard part. There'll be much more work involved, but again, we know what to do. As we've said in the past, we're winning in areas that we can control. Although we know that most of our investors listen to the webcast or review the transcript after the live call, we'd like to invite those participating in today's call to ask any questions you may have or to share your comments. Michelle, would you please begin the Q&A session?

Certainly. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question is from the line of Anthony Rubin. Please go ahead.

Hi. Good morning. Congratulations on what can only be considered an outstanding quarter. I'm glad you are finally, as you say, an exciting company. You and Kevin, I think, make a very good team and a period of a strong vision. My question is, I see that Celestin, your flagship product, is up over 200% year to date. And you did a nice job of explaining some of the macro factors driving future growth. And I note your comment in the press release regarding $27 million of backlog, which it appears about 17 million will carry over into 2022. Given this, is it reasonable to expect 100% plus or minus Celestin, or if you prefer the combination of Celestin and skin health growth in 2022?

Well, thanks for that question. Probably not 100% plus for Celestin's standalone in 2022. Probably sizable growth. You know, year over year, you know, we're up 80% for the nine months We expect to have a fairly good Q4, and between APIs and Celestis next year, certainly it's going to be higher than this year. The question is, there's a few things. There's growth, the growth curve when it starts. We've got some launches in the works, which are always heavy on the front end, and then the follow-on orders are what drive the serious growth. And those aren't all lined out at this point yet. We're also in the process of expanding our capacity, and that's something that's been a challenge just in terms of everybody's already got a lot to do, but we've gotten to the point where we're going to need to add space and some equipment to deliver on the potential volume we see going into next year. So it's a roundabout way of not answering your question, but totally, I don't expect the company to double next year, which is kind of what you're saying in size. But I do think that size of a company is not unreasonable. I mean, our targets in the longer term, several years out, are greater than that.

Okay. Yeah, so basically what you're saying is Celestins may not quite get to 100%, but you're anticipating sizable growth, particularly in Celestins and skin health. And just one other question. And I'll let other people ask questions, of course. And I think reinstating the conference call is great. Do you have any other plans to be more shareholder-friendly, such as upgrading your exchange, especially as your financials and stock price now support it?

We do. A lot of that is, you know, on the conference call side, we reinitiated them. Partly the reason we stopped doing them wasn't because we wanted to keep people in the dark. It was just a question of everybody's really busy, and we are just grinding away to make this happen. And one of the reasons that the results have been even stronger on the bottom line has been that we've really limited overhead expenditures, which part of that is having more depth on the IR side and the finance side to do some of this, as well as on the sales side. Kevin's time is critical, and it's just hard to make the time That is a goal. In terms of upgrading the listing standard, there are a lot of steps to get there. It's expensive and it's time consuming. That certainly is something that I think all of us would ultimately like to look toward, potentially first within OTC, which has some advantages and different levels of participation than where we're at, and then ultimately to become an ASDAQ company again. But that, again, that will be in the future, and that will be really dependent on growth and dependent on stock performance, really, because we also have, as you probably know, there are a series of standards that have to be met to get in there and to get there and stay there. And so we want to make sure that we're strongly in that camp before we do anything.

Terrific. Well, congratulations again. Terrific quarter, guys. Thank you.

Your next question comes from the line of John Henderson. Please go ahead.

Hey, guys. Congrats on the major inflection point and your outstanding momentum. I know it's been a lot of hard work, so well done. Thank you. Just trying to understand the business a little bit more. In terms of seasonality, is Q4 typically – you know, kind of a slower quarter relative to, you know, I guess Q2 and Q3 maybe are your strongest quarters. It would seem as though Q4, you know, looks like it's poised to be a barn burner. You know, how should we think about that just going forward in terms of modeling, you know, the seasonality of the business?

Thanks for the question, John. So a couple things to factor in. A lot of our business in Solescence specifically is not really driven by the seasonality that you would typically see in sunscreen. That's largely because there's skincare and color cosmetics products, so they're used all year long. So to a great degree, that helps us out. There's still, of course, some strength in terms of when brands like to launch products And a lot of that will happen if they're retail facing actually through the end of Q4 into the beginning of Q1. And if they're more direct to consumer or in more specialized retail channels, that'll happen more toward the end of Q1 and beginning of Q2. So given all of that, And given that we're still a growing business which has a lot of new launches happening every year, we end up having a really strong Q4 into Q1 and in the beginning of Q2 usually in terms of just what drives our volume. On the API side, it's a little more seasonal. Again, because a lot of that business is retail-based, that becomes a strong Q4, Q1-type business that drives when the launches are occurring or when the fill season, as it's referred to, is occurring for those types of materials.

Understood. Thanks. And just moving toward the topic of the manufacturing capability, you know, are you able to kind of give more specifics in terms of, you know, where you guys are on those initiatives, you know, and kind of, you know, what challenges you're facing as you try to scale?

Yeah, that's a great question. I think most of those challenges, as Jess indicated, are known challenges. There's nothing that we're working on that we don't know how to solve. The issue of course is the same thing that most companies are facing, which is long lead times on equipment and other supplies and materials to build out the infrastructure, which ends up adding to the time that it takes for us to implement some of the improvements. Most of what we're doing in the Celescence part of the business is to add additional automation so that we can increase our capacity through higher throughput. On the other side, with the API business, a lot of that has to do with, again, it's sort of, for lack of a better way of describing it, That business really is built around technology that we build, essentially. So the equipment used there is really just a lead time issue in terms of having that equipment. But finalizing that whole statement, what really ends up being part of the challenge is space. And as I'm sure you know, It's an unprecedented market for real estate now as well, particularly in our areas where there's lots of manufacturing and distribution. So just putting all of those things together has been really the biggest challenge in terms of time and getting that implemented, which to some degree is what, as Jess mentioned, is part of the reason we haven't been doing a lot of these types of calls in the past.

I think it bears, there's a couple of takeaways, John, there that everybody should consider that I take a lot of solace in when I look at the numbers. We're happy that we're profitable. It's exciting. But we are operating it efficiently and we know it. We are trying to get everything out the door. We're working overtime seven days in many cases and we haven't automated and kind of streamlined as many processes as we like. We have multiple facilities. We're doing a lot of things that are just inherently not efficient, but the things you have to do because the goal, number one, is to get the product out the door and satisfy your customers and their launches. So I would expect over time to see the margins improve on that type of business because we're really, again, not as efficient as we should be. The second point on the cash side is we've could all see that we've really expanded our inventory over a period of time. And that's something that, you know, typically nobody wants a big, fat inventory number. You want to turn that into cash as quickly as possible. And, you know, we've got $2 million more in inventory at the end of September than we did at the end of December. That's not just a function of growing sales. It's also a function of the supply chain issues. And we've decided to order ahead of On some of these cases, we're getting pushed out months in some cases, so we've been able to respond to customer needs to a good extent. I won't say a great extent, good extent, because we're kind of building a war chest so that we can go ahead and turn around and satisfy them. So my takeaway there is we did it intentionally to a high degree. It's not based on inefficiency necessarily. This is based on strategy, and then over time, I would expect inventory to be lower as a percentage of sales than it is today.

Great. Thanks for that feedback. And, you know, it's, again, very impressive what you guys are doing, even with all these inefficiencies. I mean, you basically had a 17% EBITDA margin. You know, your EBITDA essentially doubled in Q3 what it did the first half of the year. So, you know, extremely impressive. And, you know, thanks for your efforts and, you know, Hopefully, you guys definitely uplift. I think the liquidity in the stock will improve along with the investor base will dramatically improve as well. There's a lot of positive flywheel effects to doing such. Again, obviously, you know that, but I just forget I mentioned that. Thanks for your efforts and good luck with everything. Thank you.

Your next question comes from the line of James Lieberman. Please go ahead.

Thank you. These are pretty extraordinary results. I was traveling. I thought I'd lose your call. Hey, Jim. Unfortunately, all of my questions were covered in these wonderful questions. Excuse me. I thought you answered them extraordinarily well and the results are terrific. Are you able to share any of your partner names so that we as shareholders and investors can in the sample, some of these wonderful products?

Yeah, thanks, Jim. Really appreciate your comments and always following us. So the challenge that we have with disclosing partner names actually is multiple fold. But one is, of course, we just don't want everybody to know who our partners are from a competitive standpoint. But also, and probably more important, is that our partners like to have a little bit of anonymity relative to what they're doing. So there's two ways that we'll try and help you out. There are a couple of partners where they have our product or our brand name, the Celestin's brand name, on their product as they're referencing our IP. One, of course, is Color Science. Color Science has a broad line of products, and they cover from top to bottom with a really broad line in their sun-forgettable line, so it's a great, great reference. The other is a company called BioClarity. BioClarity is a smaller indie brand on the grow. but they also have a couple of great sunscreen products that we have developed and manufactured for them. The other thing we'll mention, and I'll shut up after that, is that there are a couple of brands that, for example, if you look into the top three, and you can do this actually on Sephora, the top three foundations, products on Sephora with SPF. One of those is our client. And so if you look into those, you'll probably be able to figure out what that looks like and have a nice holiday gift for your significant other, perhaps.

Well, thank you for those hints. I really appreciate it. And then also congratulations on your addition to the board in the last year, and your head of marketing. That's a tremendous addition to the company. Congratulations all around.

Thank you. We're very happy with those changes, and Laura Barris has been a wonderful addition to the board, bringing great experience and wisdom beyond her age, for sure. So it's been a great thing. Thanks a lot, Jim.

Thank you.

Your next question is from the line of Jan Dudek. Please go ahead.

Hey guys, congratulations on the great results and the great turnarounds. My question is about, you were talking about your inefficiencies in the manufacturing process. Where do you see your long-term gross margins in the business? Because also this quarter they accelerated a lot. Where do you think they stand in the long-term?

You know, it's hard to say with a lot of accuracy because we've got a, you know, historically, Jan, I don't know how long you've followed us, but people like Jim and Barry and some of the other folks around have been around a long time, Wayne. Historically, the more volume we got, our gross margins would just shoot up directly because we had such a big overhead requirement to deliver the CGMP products that, you know, as soon as volume went down, we were down. You know, we really took a hit. In this case, currently, the margins are – we tend to focus on variable margins within the business. I don't want to share those with you exactly in terms of targets, but we tend to focus on that because we've got – in the three different areas of our business, you know, you've got three very different means of production that require different levels of overhead to support them. So you've got to – For the API business, our largest customer there is BASF. They're going strong. That volume is in the hundreds of tons of volume, and it requires a big quality infrastructure. And I think at some point, not too soon because we'll go nuts, but at some point we'll be breaking those things out a little more because our capacity for manufacturing that material is supports Solescence, but it only requires a very small fraction of that part of the business to support Solescence, whereas with Solescence, you do a lot more testing because basically this product is going right onto a consumer. So the testing costs, which are also in cost of goods, are much higher. So you've got an odd, difficult to pin it down. I certainly think that we should be able to get into the 40% range. possibly higher. And some of that, you know, on the health sciences, life sciences side, those margins are strong, but they also, so their investment, the cost on that is often in R&D, as you know. That business is a business that we're banking on in the longer term to also deliver some nice returns. And I realize, just gave you a little bit of financial word salad, right? Because we really don't have all of this broken out perfectly. I think it can be higher. I don't like... Personally, in the 30s, it's not generating enough, but I will say that when you compare what we're doing with a lot of other companies, and unfortunately many of them are private or big or small parts of giant companies, I think our margins hold up pretty well. I think our cost of production is good. I don't think we're non-competitive in those areas. If anything... volume is going to help because we just, you know, we still have one of the things that the folks around will know. We've got, you know, we've got 60-odd, 70 employees. We've got temporary help, and we generally cross-train everybody. And that comes with a blessing and a curse. When you're running lean, it's great because you can move people from one facility to another, one process to another, and have less wasted labor. On the other hand... as you get busier, you could then have kind of purpose-built lines of facilities and people that are just focused on one thing, which is inherently more efficient. And we haven't quite gotten to the point where we can gauge that as well as we should. So those are things that are, you know, it's going to improve. You know, is it going to improve by 10% or 5%? Not sure. What I do know is that Without, obviously, I don't want to exaggerate, but I think the growth on the top end of the Celestis business, the potential is very, very high. I mean, there are businesses that are selling hundreds of billions of dollars' worth of materials here that we are competing with in the areas we're competing with. We don't have the volume they have, but we have some of the customers they have, and we have a lot of customers they want, which are the prestige customers. Mm-hmm. All in all, I think the outlook is pretty good. We'll know a lot more, as horrible as it sounds, we'll know a lot more as we get through next year and we get the facility situation leveled out a little bit. I mentioned before with the employment market, we are adding people and trying to do that both efficiently and also bringing people in with experience to help our organization, which is a learning organization, continue to grow.

Great. Thank you very much. And the second question is, where do you currently see your biggest risk? Is it like your competitors that are maybe doing similar things that you maybe compete with them? Or where do you see your biggest risk in the moment?

I'll let Kevin grab this one.

Yeah, thanks, Jess. Jan, I think our biggest risk right now is actually supply chain. I think meeting the demand and ensuring that launches happen on time, that the pipeline gets filled, that product is on the shelf when it needs to be on the shelf so consumers can buy it. That's really our biggest risk. It's also an area we're investing heavily in relative to bringing on new staff, and improving our visibility there to try and improve the management of it. And as Jess already mentioned, buying ahead. So we've put a lot of that, tried to mitigate some of that risk by putting a lot of money on our balance sheet, specifically in inventory. So there's always competitive risk that we are aware of. That is, in our view, the lower of the risk elements. And then there's modest regulatory risk that exists. But really, I think right now, supply chain is the number one risk.

All right. It's great to hear that your competitors are not your biggest risk. I like that a lot. Thank you very much. You're welcome. Thank you.

And once again, if you do have a question, please press star, then the number one on your telephone keypad. Your next question is from the line of Ron Richards. Please go ahead.

Hi, Jess. Can you hear me?

Hi, Ron. Yep.

Yeah. Earlier there was a reference made to the price of real estate. Was that because of the difficulty in obtaining new employees or Are you looking at capital facilities expansions?

That was really in reference to facilities. While there's a glut of office space because of all the changing work environments on the industrial side, where we are particularly, there's a shortage of manufacturing and warehousing space. Probably more so, manufacturing has made a nice comeback. We're big in I mean, that's what we do. We've had a great few years so far, but the warehouse and distribution space is just going nuts, partly driven, I imagine, by people being home and ordering online and people changing their business models, et cetera. So the reference was finding the space. The cost is important, but availability is important as well because we're not in a situation where we can say, let's get a ginormous building and upfit it and get it all set and move everything into one space from the three properties we have now. We have to migrate and do it in a smart way in the local market so that we don't disrupt the business. So it's more challenges of that.

Okay. And one more question. A year and a half ago when your stock was selling for 18 cents, it was more difficult to raise capital. I think you have something like 50 million shares. Would it be prudent to have a small secondary of around 2 million shares or three to wipe off some of your debt and position you a little bit better for the future?

You know, that could be, Ron. You know, we currently something that we're always looking at, the financing of the business, whether it's working capital financing or whether it's equity financing. And we're always concerned about dilution. Obviously, dilution was much more painful at 20 and 30 cents than at $3. And I think it's something that we've been discussing. It's a question of when and why and to what extent we want to do it. But I do see that in the future. as a good possibility. We just need to, I think we need to look at it a little further before we decide what we do. And we have no immediate vision toward anything big, you know, relative to those kinds of things. But what you suggest is a good idea. Good problem to address, I should say. Sure.

Your next question is from the line of Barry Blank. Please go ahead.

Thank you very much. My questions, several of them, are basically on the same thing in financing. Number one, I think it would be a big advantage for the company to either A, list on NASDAQ or on the American Stock Exchange Division of the New York Stock Exchange or some other place than where you are right now, strictly on the over-the-counter market. I manage a brokerage office, and my firm allows us to be able to buy stocks to trade in your space, but a lot of brokerage firms do not. And a lot of firms do not allow people to purchase stocks under $5 when these stocks do not trade on an exchange. Have you any thoughts of listing on either NASDAQ or maybe the American Stock Exchange Division or the New York Stock Exchange?

Hi, Barry. You know, we've been looking at those things. I mean, part of it is the degree of busyness that we've had. I mean, it's important to obviously, I believe that, and we believe as a management team that we owe our shareholders the best ways for them to get a return for investing in this company. Both of those things require not a huge amount, but a fair amount of additional overhead to do but more so getting resources to support that in-house. The auditing is much more aggressive. The paperwork requirements are much higher. We've been lean, as you know, with the combining of duties in terms over the last several years, and I think those are good questions. We certainly aspire to be listed on a on a major exchange that has greater liquidity for the benefit of both of our shareholders, and in the event that we need to raise capital at some point, I agree, the currency is better. We've had a few people calling in asking the same question and wondering what it would take, and it's something that we're examining. I definitely would say that we aspire to that, and I think it's a great question and it's a great goal, part of it, again, has to do with the size, and we spend a lot of time, Kevin and I and the whole team here, keeping things moving forward just to get the sales out the door, and I think the very next focus has to be, okay, now we get the sales out the door, we get the facilities straightened out, now let's absolutely maximize the value of this enterprise in every way, not just on the sales side and the bottom line.

My second question is hardly anybody has ever heard of the company. And there's a very small footprint out there and a very small people. I have tried to call the company several times and never gotten any response. I guess I know you're busy and I don't fault you for that. But at some point in time, you are going to raise money. You have to. I mean, whether it's next year or the year after, whatever it is. And it's going to be a big difference for the value of the shareholders and the price that you're going to have to pay for it is if there's customer demand. When I say customer, I mean stockbrokers, customers or something. When there's demand for the stock and there's no knowledge, so people don't call. I have presented it to people. We have a substantial position in the stock. But the point is I'm one person. and you need a lot of more than one person to do it. And I just wonder, are you doing anything? I certainly don't advocate hiring an IR firm and spending a lot of money. That I don't think ever does any good. Companies spend fortunes on dinners and this sort of thing, and it doesn't do any good. If the company is good, people will seek it out, but they can't seek it out if they don't know about it.

Sure. We are doing some things. One of the things... Obviously, one of the things is today, increasing the call. We've tried to beef up our disclosures. We're also in the process of revamping our website, which is going to be helpful because right now we don't have – the IR section is dated. We know that. The Celescence website is pretty nice. The Nanophase website is a little dated. And we are in the process of doing that. It's just on the list. Further, one of the things that we – we want to do is to have more information on the website that is not necessarily material, nonpublic information getting posted the wrong way, as much as background information and ways for people to access the story. Because generally, you know, when I talk to people and they ask about what we're doing, you know, I point everybody to Celestin's website because it's more concise It's got some examples that are more digestible. I think that's a plus. And in terms of other activity as in going out and doing some of these presentations and things like that at various investor conferences, I think that will be something on the list of things. I don't know if we get into that by late next year or not. I know that, you know, to your point about IR firms, you know, I mean – When you get results, the story tells itself a lot better, but you've got to get it in front of people. And this is one of those great times where we're finally at a point, you know, we all feel like this took us longer than it should have, but we're at a point where we're at an inflection point. And it's obvious if you start looking at the last several years, things are going to be more stronger. I mean, we're perceived more strongly. We're bankable all of a sudden. You know, we're regular bankable. There's a lot of things that are happening that are solid. So I hear what you're saying, Barry, and it impacts all of us. It impacts us on the capital side. If we need to raise capital, it also impacts all of our shareholders and stakeholders to have people be aware of this business. And I've got to say, the Celestis story has been so strong that I think that will be a real help over time with the limiting factors that – Kevin mentioned that customers don't want to be named because the whole point of using somebody like us is to take advantage of the technology and have your name on it, not our name. But I agree with you, and that is something that we will be doing more of. And I also apologize about not being responsive. Part of the issue, which will be helped by – doing investor calls more often has been that if somebody calls me and wants to talk about the company, in addition to the fact that we're just crazy, I mean, we're, you know, we literally pretty much seven day weeks now for a couple of years. But in addition to that, if we're not talking publicly and not giving anybody an opportunity to ask questions and then somebody calls and we, there's not much to say other than, I can't really tell you anything because it's unfair to the rest of the community. So I'm more comfortable expanding that part of the business as we get more into the rhythm of these calls as well.

No, I understand that. But returning a phone call, so there may not be any questions. You don't know what the questions are going to be, and I certainly don't ever see. I visited you, I think it was probably more than six years ago, But anyway, it's not a question of that. I just think that people may want some information to be able to send to people. But let's not go on. The next question that I have, basically, and correct me if I'm wrong, it appears to me that about 70% of the stock is owned by one person or one group of stocks, which costs not very much liquidity. I mean, people cannot... somebody or a fund wants to take a big position in the stock, they can't get it. And that, I think, is also a limiting factor. There's not much you can do of it. There are a few things that you can do. I don't know if you ever thought about a stock dividend. I mean, people do, especially in the retail people, even though it doesn't mean anything, the pie is cut in different slices, people do consider it. They think they're getting something. And in addition... Even though you are diluting it, you're diluting it to yourself, but you're providing more liquidity into the market, which if the stock is going to be a $10 or $20 stock, you're going to have to get some institutions in. You're going to have to get some people who cannot get positions. I mean, it's virtually impossible to fill a 50,000, 60,000 share order. It just doesn't happen. So I wondered if you might consider that. And part of the same question is it's very important for employees to to consider themselves as owners of the company. And it's very important that you get employees to buy. I don't know if you're getting any kind of a plan for the employees. It keeps retention. It keeps them wanting to work harder, see their money grow. And I haven't seen anything on that aspect. And I also have one other thing that sometimes is a help, even if it's on a minor basis, would be insider buying. It could be small pieces. Of course, you can't buy one that's material material. information out there that hasn't been disseminated. But these are a couple of things that could help the company and not cost anything.

Sure. I'll look into the stock dividend concept. That's something we really haven't considered. And you're right, it's dilution.

I've done it for many companies, and I will be glad to help you and give you advice if you want to call me at any time.

Regarding the employee stock plan, we do have an equity compensation plan that many of the employees are quite vested in, but we don't have an employee stock plan. Part of that is the complexity of setting it up, and part of that is as well as just the, you know, if you do the math, you'll see our 10Q will be out shortly, and currently we probably have less than a million shares available to do anything with that aren't already locked up in a plan. So that has to be addressed in a broader sense, but I hear you on that. And on the insider side, yeah, I think that's a good thing. I think part of it, we've got so many insiders that have been here as long as they've been. You probably saw, the group probably saw a little bit of insider selling recently, and some of that has to do with the fact that the options expire after 10 years or seven years, and we are at a point where we've got, fortunately, we've got good people that have been here 10 years, and they are at a point where they don't want to lose their stock options. I think if there were a legal way, which there really isn't, to extend those beyond 10, that people wouldn't be selling them. So it's more likely that we'll see some degree of selling coming up over the next year or two. We've got... I think in August, November of next year, and then February, we have some expirations, and we also have a very aggressive insider trading policy. So just between December 25th, say, the 25th of each quarter, between December 25th, the last, if you look at it this way, if you file the 10Q, say, November 15th, You've got 30 days, 40 days, I don't know how many market days to sell it. And then December 25th, we're closed out basically until generally the end of February, early March. And then we go out again March 25th. So in a given year, you know, there's 240 trading days. We probably only have 100 available. And had we anticipated these issues... we probably would have had grant dates at different times so the expirations didn't happen in the middle of a blackout or right around a blackout. So there will be some of that that's going back and forth, and I wouldn't take that as a sign of a lack of vesting or a lack of commitment on the part of management.

That's understandable. And also the fact is, you do need to get more stock into the market to create small cap funds and larger institutions. But listen, I've taken enough of everybody's time, and I just wanted to thank you for a good job that you've done.

Thank you. Thank you, Barry.

Anthony, your line is open.

Thank you, gentlemen. I just have just a quick remark and a follow-on question. I know the call has probably gone much longer than you anticipated. As you said earlier, Jess, you are now bankable. And contrary to what some other individuals have suggested, I would suggest financing growth with debt or non-dilutive financing, equity financing, given you're still highly undervalued stock, I don't think. should occur until valuations are quote-unquote fair. And just, you know, tweaking my model with the comments that you gentlemen made earlier, even with a more modest 50% revenue growth in 2022, it's hard to imagine the company wouldn't be worth double digits a year from now. And like some other people have said, perhaps to accomplish that non-operational task of share value, it might be necessary to participate in industry events to gain awareness, which would drive the appropriate demand, Stock price, I think, liquidity takes care of itself if there is enough demand. But just from a business question, given your strong growth and what appears to be or what you've said is demand outstripping supply, are there any plans to expand either through licensing or direct manufacturing in Europe where, you know, Prestige Cosmetics, you know, were founded and obviously, you know, a major business as well?

Thanks, Tony. Yeah, let's answer the manufacturing question. A lot of what we've done in the past three to six months in terms of our capital investments will help address a good share of our backlog issues. So that is definitely at top of mind for how we're going to address capacity and we'll be in a much better shape to do that as we exit Q1 of next year. In terms of Europe and in our view also Asia, whether that's through Australia or some other area, We do see that as an area of expansion. We are evaluating how we best address that expansion. We do have, by the way, clients or brand partners in both of those regions already, but really aren't there from a footprint standpoint and therefore only modestly participating in those areas in comparison to what we could. So definitely part of what we're considering in terms of really expanding our footprint, which will in part also help to address some of our capacity issues.

All right. Thanks for clarifying that. I'm glad you do have clients there, and it sounds like that's just another source of potential growth. So that's more good.

Great market for this kind of thing.

And I'm showing at this time there are no further questions. I'll turn it back over to you guys for closing remarks.

Thanks, Michelle. And thanks, everybody. It was a great Q&A. These are challenging times for us at Nanophase and Celescence, but they're the best kind of challenges. We left Q3 with almost 30 million in purchase orders in hand. We're on a much steadier and sustainable footing with Celescence. We're seeing growth in APIs, both both of these supported by a directional change in the markets we serve favoring mineral-based products. And we've proven successful in helping to identify and combat some of the greatest acute health challenges that most of us have ever seen. So I just say hang on. It's only going to get better. We're looking forward to the next opportunity to discuss the business again with you after year end. And thanks again to all of you for taking the time to listen and to support our exciting companies. Have a great day, everybody.

And this does conclude today's conference call. You may now disconnect.