Nanophase Techs Corp

Good day and thank you for standing by. Welcome to the Nanofaith Technologies fourth quarter and full year 2021 financial conference call. At this time, all participants are in a listen-only mode. After this speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. To ask a question during the conference, you will need to press star, then one on your telephone. If you require any further assistance, Please press star, then zero. The words believe, expect, anticipate, plan, forecast, and similar expressions are intended to identify forward-looking statements. Statements contained in this news release that are not historical facts are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect the company's current beliefs and a number of important factors could cause actual results for future periods to differ materially from those expressed in the team's release. These important factors include, without limitation, a decision of the customer to cancel a purchase order or supply agreement, demand for and acceptance of the company's personal care ingredients, advanced materials and formulated products, changes in development and distribution relationships, the impact of competitive products and technologies, possible disruption in commercial activities occasioned by public health issues, terrorist activities, and armed conflict, and other risks indicated in the company's filings with the Securities and Exchange Commission. Nanophase undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties. I would now like to hand the call over to today's speaker, Mr. Jeff Janskowski, President and CEO. You may begin.

Thank you, Kanya. Good morning to all of those listening live and welcome to those who chose to listen later online. We're glad you could join us for our fourth quarter and full year 2021 investor call. Today's discussion will cover current results, the current state of the business, and some of our plans for 2022. Kevin Keratin, our Chief Operating Officer, will be joining me on the call today. It really was a great year. We are now a company that can sell everything we can make and more, which, while frustrating to a degree, puts us in a much different place than we've ever been. Our strategy remains on the mark. The markets we serve are demanding our products, and we've enhanced our liquidity and begun expanding our facilities to support a critical expansion. As I mentioned last time, We've been able to accomplish that most critical achievement for any growth company, particularly one like ours that is driven by new and disruptive technology. We've guided our companies, Nanophase and Celescence, to the point where business development and sales growth are not our biggest challenges anymore. We continue to be asked by our customers to ship more than we can make, which is an excellent problem to have. Last quarter, we told you that our greatest current challenges were enhancing and expanding capacity, managing working capital, and adding top people to our team. We also told you that these were all addressable challenges and typical ones that all fast-growing companies are faced with. Since that time, we've executed on several of our goals to make Nanophage and Solescence more capable, larger, and ultimately more profitable. In December, we leased a 260,000 square foot building that will allow us to consolidate a series of operations that have been limiting our throughput and efficiency In January, we closed on new financing to support our growing working capital demands, providing $6 million more in available capital. And between December 21 and today, we've filled two newly created leadership roles on our commercial team, as well as adding more than two dozen new team members across our manufacturing and supply chain functions. We have a lot of work to do in 2022. Some of it will be rugged, but in the end, with a degree of patience and good management, There are known ways to address the issues that we believe are holding us back. We're in a better spot than we've ever been in before. Now we have to execute. 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. If anything, over the past few years, trends toward broader consumer acceptance and desire for minerals-based skin health products have accelerated. Before I expand on this, let's cover some numbers. Unless identified otherwise, all numbers will be stated in approximate terms. Our Q4-21 revenue was $7.4 million, up by $2.5 million, or more than 50% when compared to the record revenue of $4.9 for the same period last year. Full-year 2021 revenue was up 72% at $29.5 million, compared with then-record revenue of $17.1 million for the same previous year. For the fourth quarter of 21, we had a net loss of 395,000 or one cent per share. This was down 590,000 or two cents per share compared to Q4 of 2020. For the full year 21, earnings were 2.3 million coming in at five cents per share. This represents an increase of 1.3 million in earnings or two cents per share over full year 2020 numbers. We generated 2.3 million in cash from operations in 2021 versus using $2.1 million in cash for operating activities in 2020, better than a $4 million improvement year over year. In 2020, we added $900,000 in capital equipment, followed by $1.9 million in additional equipment in 2021. These things are going to allow us to increase our throughput and then our profitability. In fact, earnings, cash flow from operations, And our new financing brought us to the point where our auditors agreed with our assessment that there was no longer a going concern risk for your company. Lifting this has been a critical achievement in that the going concern has been an impediment to financing as well as weakening our negotiating position in various circumstances. To tie up the discussion of the financials, I also wanted to disclose that during our annual audit, we determined that we had a material weakness in our internal controls relating to our inventory for the year. During this process, we were forced to spend an inordinate amount of time on completing a full physical inventory for 2021. Our inefficiencies here cost us in time, money, and opportunities to ship more product. This issue was closely related to the jump in 2021 sales volume. We stepped up to a new level of volume and complexity in our business, and the limitations within our existing controls and business systems were exposed. We were all very frustrated by this, mainly from the impact it had on our operations in the period of December through February. Undoubtedly, our sales and production were reduced during this period over what we expected. External factors compounded our issues and slowed production further. This was all due to several things. First, actually grinding through the physical inventory and then the related documentation took time. Then, we had lags in our supply chain, which kept raw materials from arriving on time. And lastly, December and January absences related to illness, probably due to the Omicron variant, took many key people out of critical roles in a situation where backups were hard to find. This spate of absences was more damaging than those related to COVID-19 had been in 2020 and the first three quarters of 2021. February was a better month, and March had us operating at a more normal level. Now let's shift gears to talk about our growth drivers. Celestin's products are still number one in driving current and expected future growth here. We had 18.2 million in Celestin sales for 2021, compared to 6.7 million last year, and 1.9 million for 2019. A triple triple. In a couple of minutes, Kevin will discuss specifics on our Celestin's growth and forward strategy. There's a lot more to come. In our personal care ingredient sales, which we often refer to as active pharmaceutical ingredients or APIs, we saw some nice growth in 2021 and we expect growth to continue in 2022. We had 7.7 million in API sales for the year compared to 5.5 million for the same period in 2020, an increase of 40%. APIs remain an important part of our business and we believe that the API business will grow by 30% or more in 2022. This should put volumes back in the $10 million annual range with some upside. Medical diagnostics and related life science applications represent our third and final strategic area of focus. These sales compose the majority of those reported in our advanced materials product category. This category also includes all of our legacy products for architectural coatings, surface treatment, and polishing. We had 3.6 million in advanced material sales in 2021 compared to 4.9 million for the same period in 2020. The majority of sales in this category represent medical diagnostics. During 2020 and into the first half of 21, the COVID-19 pandemic greatly accelerated our sales in this space. However, we saw a drop off in medical diagnostics for the second half of 2021. While we don't expect 2022 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, sometimes a fraction of that. While volume was down a bit in 2021, we are committed to this market, as is our major customer in it. 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 remains our view that the expanded testing environment we've been living under, regardless of the specific virus to be targeted, signals a trend toward greater acceptance of the practice of testing as a normal part of our lives. This is why we've elevated development in this area to become our third major strategic focus. To recap, Our three strategic areas are in order of expected near to mid-term growth, Celestin's fully formulated products, active pharmaceutical ingredients for sun and skin care, and medical diagnostics ingredients. We still have some legacy products and a few industrial applications, but we're not doing any further product or market development in this area. Now I'd like to introduce Kevin Curitan. our Chief Operating Officer, to discuss progress in these strategic areas and their drivers in greater detail. Kevin?

Thanks, Jess. To begin, I would like to thank all of our investors for your continued support of our company. Your presence here reflects positively on the progress we have made and the mission our company is on, to enhance people's lives through healthy skin. Today, I would like to provide a bit more depth in terms of our business performance, specifically the Solescence business, to help put a bit more context around the results. I'm sure you all can appreciate our challenge, which is to provide you, our investors, a deeper understanding of your company while trying to protect information that our competitors would like to learn and our clients and brand partners don't want to reveal. We think we have a path forward to do this by providing general descriptions of our performance and improvements to our ability to generate profit through increases in staffing assets and geographic scope. We did provide a bit more of these details in the recent press release than we have in the past, so I will follow that same approach in this discussion. Let's begin with the revenue side of the business and some basic facts around our company. While we're not willing to state the specific number of clients for the reasons I mentioned earlier, we have between three and four dozen brand partners that have either received shipments, placed orders, or both during 2022. This is approximately a 40% increase over 2021. I stated in the press release that we have retained over 90% of our clients. To put this in perspective, we only had two clients that did not return from 2021, and their combined purchases were less than $250,000 or 2% of our revenue. We are fortunate to note that we have doubled the number of clients that purchased more than $1 million in products from us, compared with just four in 2020 and two in 2019. We do continue to work with a wide range of early-stage clients as well, however. As you know, in this business, one of these clients may be the next Estee Lauder or L'Oreal. And we're excited to also note that a couple of our early-stage brand partners that launched in 2021 have already exceeded $500,000 in orders and shipments in 2022, showing the traction of the programs that we've developed with them. We have also launched more than 250 products with our brand partners, which includes products with the leading clean beauty brand in Sephora, the leading derm-positioned skincare brand, and three different billion-dollar global skincare brands. This obviously shows a bit of our scope and scale that we've started to develop. When this is all pulled together, This resulted in having in hand orders that already equal 2021 results. Further, when these orders, when combined with the forecast from our largest clients, we expect solid full year growth with the lessons revenue in 2022 approaching the 2021 results of our entire company. When we started our company's transformation at the beginning of 2020, We knew that given our limited capitalization and organizational capacity, that we had to be laser-focused on one or two priorities to enable our success. The two areas that we chose were to be consumer-focused product development and technology superiority and foundational operating capabilities to enable us to meet the demand we would create. This focus helped us establish our business and our growing leadership position as a partner of choice for brands. Also helping to launch a new generation of beauty products, products that not only feel and look great, but are also designed to enhance the health of your skin by addressing the leading cause of premature aging, UV damage. While far from complete, our successful revenue growth indicates that we are well on our way toward creating the dynamic growth vehicle we envisioned. We have now entered a new phase of our growth plan. During this next phase, our focus will include pursuing operational excellence while we drive growth, remembering that we still seek to drive growth. Operationally, our goal is to be a customer-focused, world-class technology and manufacturing organization. The changes we will make to our business to achieve this goal will largely fall into three key areas, people, processes, and production assets to increase our organization's breadth and depth, much of which Jess has already talked to. We have already begun steps toward achieving our goals. For example, as Jess mentioned earlier, we've added over 30 people to our team in just the last 90 days. We are also aggressively expanding manufacturing capabilities in terms of scale and speed in all areas that we manufacture. ranging from our zinc oxide production all the way through the finished goods packaging capability that we've added. While our plan is to further elaborate on these activities during our next conference call, we also want to note now that the benefit of these changes won't show up overnight, but will instead be accrued with steady improvements in gross margins and operating profits over the second half of 2022 and into 2023. In closing, while we recognize we face many challenges to come, we also remain confident in our ability to further execute on our growth plan based upon the evidence of the past year. Even with the rather limited capabilities we had in place in 2021, we are able to grow our income by more than twice the rate we grew our revenue. Profit grew by two and a half X over 2020, while top line grew slightly over 70%. As our tagline says, the future of sun care is the future of beauty, and therefore, the future of your company still shines as brightly as the sun. Now I'd like to hand things back over to Jess for some closing comments before we begin today's Q&A session. Jess?