Nanophase Techs Corp

Plans, forecasts, 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 provision of the Private Security 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 this news 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 relationship, the impact of competitive products and technologies, possible disruption in commercial activities occasioned by public health issues, terrorist activity, and armed conflict, and other risks indicated in the company's filing with the Securities and Exchange Commission. Nanophase undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties. Thank you for standing by and welcome to the Nanophase First Quarter 2022 Financial Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question, you will need to press star 1 on your telephone. Please be advised that today's call is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Jess Jankowski, CEO of Nanophase Technologies Corporation. Thank you. Please go ahead, sir.

Thank you, Justin. Good morning to all those listening live, and welcome to those who choose to listen later online. We're glad you could join us for our first quarter 2022 investor call. Today's discussion will cover current results, the current state of the business, some of our plans for 2022, and a forward look. Kevin Curitan, our Chief Operating Officer, is also with me here today. We received some feedback that our Q4 results were disappointing, as I'm sure our Q1 results could be interpreted to be. We want to address this directly today as it's more a matter of interpretation in our view than a statement of direction. I'll spend more time on this after the numbers, but the context in which I'd like all of you to place our results are bounded by certain assumptions that we, as your management, are considering and executing on our strategy. We're seeing high demand for our technically enabled products by consumers and brand partners undergirded by a favorable regulatory landscape. The seeds of our growth were planted during 2018 and 2019, with little additional marketing and customer development done through 2021. And we're at that rare time in the life of a disruptive technology where building more business is limited mainly by our ability to produce more product. These are the reasons why we also believe that we need to accelerate our marketing and development at the same time we address our operational issues. We believe that the greatest way to enhance the enterprise value of Nanophase and Celescence isn't simply by improving earnings, but also by expanding our footprint in a series of prestige cosmetics brands that will allow us to build a formidable and higher profile presence, and in doing so, create a greater barrier to entry for our competitors. This is how we plan to maximize the return to all of our shareholders and stakeholders. Before I expand on this, let's cover some numbers. Unless identified otherwise, All numbers will be stated in approximate terms. After a challenging January and February, we finished with a record march to bring Q1-22 revenue to $8.2 million, up by $1.1 million when compared to the record revenue of $7.1 for the same period last year. It's worth noting that we had some internal issues that kept us from shipping another $2-plus million in products during this past quarter. March 2022 revenue was a record $3.8 million, and we expect this to be closer to where we can operate going forward. More on that later. Net income was about $60,000 or zero cents per share for the first quarter of 2022 compared to $360,000 or one cent per share for the same quarter of 2021 before including the $950,000 and other income generated from the forgiveness of our PPP loan in February of 2021. That was a one-time event in 21 that didn't relate to operations. Our Q122 gross margin was at 2.2 million, or 27% of sales, reflecting an increase in total dollars, but a percentage decrease of 2% when compared to the prior year's first quarter margins. We had no medical diagnostics material sales in Q122 compared to 900,000 in Q121. We estimate that reversing this change in revenue mix would have caused Q1-22 gross margin percentage to be slightly higher than that of the prior years. We built significant inventory in Q1 of 22, increasing the total on our balance sheet by $2.5 million since 12-31 of 21. This was mainly due to our continued strategy of building raw materials inventory to buffer current supply chain limitations, while some of it was also due to work and process inventory that was not converted in time to ship in March. As you can tell, we're being impacted by the growth we've experienced, along with the things we discussed during our last call, chief of which were inventory issues compounded by COVID-related absences during January. These things amount to growing pains, which have definitely impacted our Q4 21 and Q1 22 results, but are transitory. While not pleasant, this will result in greater strength, ability, and capacity for our company. The margins were depressed, but this is due to the investments we're making to maximize the value of this business. As we mentioned in the press release, we shipped better than $3 million in April, and we have purchase orders in hand for another $24 million in 2022. We also have purchase orders in hand for more than $6 million in revenue for 2023, and it's highly likely we'll receive more purchase orders for 2022 during the balance of this year. It's also likely that a substantial portion of our 23 purchase orders would be happily accepted by our customers in 2022 if we were able to deliver. These things point to why our throughput and expanding capacity to support coming growth are so critical to us. Now, I want to add more context to the way we're viewing the Nanophase and Celestis businesses. We believe it's important that you know what's motivating our decisions and how we're evaluating our progress. To that point, I'd like to revisit the assumptions we're operating under in greater depth. First, our Celescence and API markets are at a point where the consumer base has become aware of the inherent health benefits to our minerals-based ingredients and products. Industry is supporting their views, and government regulators are putting the cherry on top by going after chemicals-based competitors regarding the lack of robust safety data. Minerals-based UV absorbers are what the markets want, and they are where we bring things to the table that others can't. For those of you that are newer to our company, the growth seeds for Solescence were planted during 2018 and 2019. We've done little marketing or new customer development over the past several years. This means that our customer base and the excellent growth within it that we're experiencing have been built upon the merits of our products, word of mouth, and the work we did prior to 2020 in getting our products in front of industry leaders. Third, We're at that rare time in the life of a disruptive technology. We're building more businesses limited mainly by the time we can invest in it. This is why we believe we have to accelerate our marketing and development at the same time as we address our operational issues, meaning efficiencies. Given the types of markets we're in, particularly for Celestin's products, we need to aggressively develop new business to ensure that our leadership position will be sustainable as more competition comes into play. Finally, We're being limited by the constraints put on our organization by the fantastic growth we've seen in our Celestin's products. The fixes to this are more of blocking and tackling in nature than rocket science. The rocket science is done. The production and operational improvements we need to make will get done by applying known solutions as we onboard the internal capacity to support them. This begs a question I like to ask our team frequently, sometimes to an annoying extent, I'm sure. What could this company look like if we could really step on the gas? If I were to put it all in a single sentiment, we believe that the greatest way to enhance the enterprise value of nanophase and coalescence isn't simply by improving earnings, but by expanding our footprint in a series of prestige cosmetics brands that will allow us to build a formidable and higher profile presence to maximize the return to all of our shareholders and stakeholders. 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.

Good morning, everyone, and thank you, Jess. That actually was a great presentation of our opportunities that are in front of us. As with every call, I would like to begin by thanking our team and really for their talent and commitment as we continue to grow our company through some real challenging times. Challenging but exciting times, I should say. Through the recent expansion of the team, we are able to both focus on growing our company while addressing the critical operating issues just covered a bit earlier within this very difficult marketplace. We still have roles to fill, but the leadership team is largely intact, and they're really engaged and ready to win. Our team's growth will help us to, for the first time in the last 10 years, actually, be ahead of the growth curve, and therefore in a position to better capture, close, and monetize the many opportunities we have available to our company in our core business. As we enter Q3, we'll be able to give you further updates on our strategy, but for now we'll leave you with one insight picked up from a beauty conference we participated in just this week. Over the prior 12 months, the retail sales growth rate on a global basis for premium beauty products was at 30 plus percent, with more than double the global retail sales growth rate of every other category. The beauty business, the business we largely operate in, is really strong, and thus it can support the dynamic growth we believe is possible in our company. We'll turn our attention a bit to our operating performance in Q1. We provided a bit more detail in the earnings press release of some of the basic elements we are measuring as we run this company. Over the next few minutes, I'll try and highlight a couple of these key items to add further context to what these changes mean. So let's begin with the leading indicators associated with revenue growth. particularly our new customers and penetration into new retail areas. Revenue growth over Q1 2021 was only 17 percent. And as Jess has already said, this relatively low growth rate was really not representative of our revenue potential, but the slow start we experienced in January. As an example of this start, our shipments in March were nearly double the shipments we had in January, which is a reflection of both weak January results and improved operational performance as the quarter moved on. In terms of our client base, we noted that we now have clients that sell the products we produce for them, not just in Sephora, which was really the primary outlet for many of our earlier brand partners. but also other leading beauty destinations like Ulta, Credo, and Blue Mercury, as well as mass market retailers like Target and Walmart. These changes are both a demonstration of the growth in the scope of where premium beauty products are being sold and our ability to partner with the companies that sell them. The broader distribution ultimately broadens the audience available to purchase the best-in-class skincare and makeup products we produce, which further increases the potential for more dynamic revenue growth. Now, turning our attention to our operating margins and the changes we expect to see going forward, we will begin by talking a bit about pricing. Please note, we are trying to be very careful in providing details, so some of our comments will be somewhat limited and restricted, largely because of the sensitive nature of pricing with our clients and, of course, if any of our competitors might have a chance to read this information as well. We don't want to give them an advantage of knowing this information. Since we have publicly announced to our clients, we can mention here that we, with really the exception of contract restrictions, we are currently in the process of implementing a double digit price increase. This increase will largely address margin issues created by increases in material and labor costs, some of which muted Q1 results. Labor efficiency is still a work in progress. in part impacted by the timing of the implementation of some of our automation initiatives and the limited operating space we currently have resulting from our growth. Over the next 18 months, we believe the planned improvements in labor efficiency can add as much as 5% to our growth profit margin without negatively impacting our ability to grow or to provide the service levels expected of us by our clients. In closing, I'll make a quick comment about Q2, as we are almost halfway through it. During this current quarter, we expect to see greater than a 30% growth in our top-line performance versus Q2 2021, and solid growth profit performance. We won't see the full impact of the price increase in this quarter, but certainly some of its benefits. And thus, we'll hold off a bit on projecting bottom line performance at this time. With the combination of improved manufacturing effectiveness, pricing to address the unique challenges of the current market environment, and the added capability and know-how of our expanded team, we are confident in a year where revenue will exceed $40 million and firmly establish our company for even more dynamic growth. Back to you, Jess.

Thanks, Kevin. As with any fast-growing company, we're still challenged to support demand for our products in many respects. We've been executing on our plans to build a more stable platform for continued growth, which I'll recap briefly. Late in Q4, we signed a lease on a new building that has allowed us to more than triple our footprint. In January, we closed on new financing to support our growing working capital demands, providing $6 million more in available capital with eyes on additional funding to support capital equipment expansion. Early in Q1, we added two experienced executives that Kevin alluded to and Jennifer Bayon and Ed Seraki to help us increase sales growth and streamline sales operations. We have rebuilt our customer success team to better satisfy our customers and to enhance order flow. And we've added considerably to our manufacturing quality and supply chain teams to both increase throughput and expand overall capacity. We have a lot of work to do through 2022 and into 2023 to build this business and what we believe will be a much more efficient organization. I've probably warned some of you out on saying this, but the hard part, the invention, the market and product development, the critical customer demand, that part is working. We're in an excellent spot. Our remaining issues are addressable and they have known solutions. It may take a little time, but our goal is to remove any production impediments to expanding sales. We're at an unprecedented place in our development, a place where we can decide if we're happy to stay where we're at, fine-tune the costs, build a nice profitable little company, or capitalize on a great market position, high demand, and disruptive technology while we have the opportunity to get entrenched in these markets for the long term. This is why we've invested in some of the items we've discussed to support that next wave of growth. We plan on growing as fast as we can while maintaining and expanding profitability. Again, we believe that the greatest way to enhance the enterprise value of nanophase and coalescence is by continuing to expand our footprint in a series of prestige cosmetics brands. This will allow us to build a formidable and higher profile presence. We're also working on improving earnings. The end goal is to maximize the return to all of our shareholders and stakeholders. Given we talked a month ago, today's prepared comments have been shorter, but we're always happy to answer as many questions as you have during our Q&A session. Although we know that most of our investors listen to the webcast to 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. Justin, would you please begin the Q&A session?

At this time, if you would like to ask a question, press star then the number one on your telephone keypad. Again, it's star one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Anthony Rubin from Individual Investor. Your line is open. Please ask your question.

Good morning, gentlemen. Thank you for your comments. I would like to first say I found your comments this morning to be tremendously helpful and insightful and provide a much different and, frankly, better picture than just from your results. So just first off, thank you for providing that. OK, so and then, Kevin, thank you for your comments on the pricing power. That was something I was going to ask, and that's a very, very positive development. So based on what you've reasserted today and with your previous press releases, I know you're saying that you'll do in excess of $40 million Predominantly based on some of your comments last quarter, I would estimate you could do about 44 million in sales. And while not incorporating some of your comments about pricing power, I would think that it would be reasonable to expect a full year gross margin of about 30.5% and a steady state gross margin of about 35% at year end. Do you have any comment on those projections? I know you can't say yes or no, but do those seem unreasonable to you?

Hi, Tony. You know, everything depends on a lot, obviously. I don't think they're unreasonable. And as I expect to see, we all expect to see our results improving on a quarter-to-quarter basis. So whether We achieved some of those things in total for the 12-month period, or whether we hit a really nice rate, particularly when it comes to profitability toward the second half. It remains to be seen, but that's what we're expecting. I wanted to, as I was going over, everybody's busy, and I was going over my script and my discussion, and I wanted to say that one of the things that we aren't talking about, so we We can't get enough material out the door, which is a great thing. We have to fix that, obviously, because we want to capitalize on it. But we have an absolutely awesome operations team, the engineers, the manufacturing folks, the quality folks. I mean, everybody is working too much and grinding to get everything done. We just start working to organize that. And I thought, well, not exactly germane to your question, as I was thinking, going through mine and listening to Kevin going through mine again, I was thinking, you know, just to let you all know that we have a team that we couldn't do it without them. They've been doing a great job. So that piece is just a matter of augmenting that and getting the systems in a smoother way. There's nothing you'd say that I would have any major disagreement with other than saying that, you know, time will tell and we still suffer from kind of the law of small numbers. Mm-hmm. You know, we have a bad week, a bad day, something happens, and we miss a shipment for the quarter, whereas for the overarching period, it's okay, but not as great as we would going forward. But as you can intuit, you know, we are looking at hitting a run rate second half of the year that will allow us to do much better in 2023 than the $40 million-plus number we're talking about now.

Okay. Thank you for that. And, yeah, I mean, as I look at it, particularly your Q4 EPS run rate seems very strong. The second question I had is, you know, as I said, you guys have done a great job in this call of identifying, you know, some of the things that have happened and some of the upsides. You know, also, as you know, the company has struggled to gain visibility, institutional progress, ownership, you know, in any sort of trading volume, or to quote another shareholder who commented on the company, says, what bothers me about nanophase is we as shareholders can't sell any significant amount of stock, just no volume. And, you know, management and the board is fiduciaries for all shareholders and stakeholders, as you pointed out in the call. Are there any concrete steps that you can point to that would provide more optimism for the ability of all shareholders to get, you know, in and frankly out of the stock, whether that would be participating in industry conferences, a timetable to an NASDAQ listing or something else, you know, that, that would help individual, you know, all the shareholders basically and, and frankly, including management to, you know, as options to exercise to, to, you know, realize the value in the company without being disruptive? Are there any, you know, tangible, concrete, timetable-laden things that you could address or point to?

Well, the most tangible thing is the, you know, we are currently in the process of hiring a controller, and, you know, we've been light by design on the finance and accounting side, and that's been pulling me into a lot of you know, writing the K's and Q's, and our accounting team is stretched really thin. And I think when that happens, that's going to help with things like better communications, a little more time to do that. All of the shareholders, minority and majority shareholders, want to see more trading, more exposure, and better access for people. And I think the first step is the visibility. The next step you know, a timetable to a potential uplisting. I don't have that yet because mainly we need to assimilate the new people, particularly we need to add our finance staff, add to our staff. I think that's going to help things and we'll have a better view on that in a couple of months. The goal is to have somebody in place, hopefully in June, if not earlier. And I think that's going to help a lot of these issues because, as you imagine, we get invited to conferences and there are all kinds of opportunities, but there are more pressing things to do here. And I agree with you that it's to everybody's benefit, up and down, shareholders and stakeholders, to have a higher visibility and higher daily trading volume.

Thank you for addressing those. And again, thank you for your comments this morning. Thank you, Tony.

Your next question comes from the line of John Henderson from KTG. Your line is open. Please ask your question.

Hey, guys. Thanks for the update and for all your hard work. I know you guys got a lot going on. So, again, congrats on the forward progress. Thank you. First question, any update on the new facility? Any expectations of when you actually might be shipping product? Is that like a 22 event or more likely first half of 23?

John, there are a couple stages to that process. We do expect that we'll have a portion of our operation running out of the new facility in 2022, so yet this year, likely toward the end of Q3. And ultimately, the majority of our operation in there by this time to end of Q3 2023. But yes, we will be really within the next couple months, Warehousing activities are actually going to be transitioned almost fully to that facility. And then it follows with some of our finished goods production activities being there again by the end of Q3, early Q4 of 2022. You guys hired about 30 people in Q1.

In terms of getting to where you'd like to be for the organization over the next quarter or two, how many additional people outside the controller do you think you're going to be looking to add?

Yeah. Some of that really goes both to staffing on the manufacturing side. We do actually have an additional director level person coming in in the manufacturing department. or manufacturing area, and then we'll have a couple other sort of engineering-level people as well as a couple other technology-oriented people. So we, in fact, have been reviewing this on a pretty frequent basis, and we usually wait until we see the movement of the business to decide which positions we want to sell. But those are the positions that I'd say we'd be prepared to talk about at this point. And I'm sure there'll be others as, you know, the pace of the business continues to justify it.

And thanks for the update there. In terms of the inventory issues you guys were dealing with, is that completely passed or is there still some lingering issues there you're dealing with?

We still, you know, we're a little late on our, not late, but our 10Q is going to go out. We're late on our call. Our 10Q is going to go out Monday, and there's some reference in there to the remediation of the issues we've had relative to the inventory. We still have work to do. We're still in the process of, we did what we said we would do. We've got got some consulting help we've also changing some procedures and doing some things differently and I mentioned earlier we've added to our supply chain team so I'm expecting I would say between us we would expect at some time at q2 early q3 we ought to be in a I mean we're in a good spot relative to our results and everything's being accurate where we're not what we need to augment is having it flow more smoothly and be less of a drain on the organization. And I would think that's going to be probably later Q2 into Q3 before we get that working as smoothly as it can.

And what about zinc? I mean, zinc's had crazy moves both up and down over the last six, eight weeks, particularly, um, you know, are you guys having any issues in terms of sourcing zinc?

No, we, we, um, Really late in 2021, end of Q4 2021, we locked in for our requirements through most of this year and a little bit into next year. I think Jess actually had commented last call related to our ability to now source domestically relative to the quality level that we need to have within our business. So that's helped, and we're very comfortable with our zinc metal sourcing.

Got it. And final question, too, then I'll cede the line. In terms of the sales organization, you guys are at the best level you've been at in a decade. Any other roles that you're looking to add there?

Yeah, well, as always, this is a bit of a moving target relative to what's happening with the continued growth of our business and, quite honestly, the number of inbound leads and, therefore, opportunities that get created from those leads. So we do have a position here. Another position in marketing and another position in inside sales that we're in the process of filling. But again, those are just like the operational positions. We will fill the need as it occurs.

And final question regarding kind of your customer base. Are you guys still literally at the point where you know, you're modulating kind of the demand from your customers. Like if everything were in a perfect world and, you know, the new facility was up and running, are you doing like dramatically higher revenues because there's a lot more orders out there that you're basically kind of, you know, for lack of a better word, almost turning away currently?

Yeah, I think the best way to put it, John, is really, as Jess indicated, there were somewhere in the neighborhood of two plus million dollars of open orders that we would have shipped in Q1 based upon the requirements and the request of our clients. In addition, we still end up with some impact on supply chain too, just getting packaging that's largely coming from Asia still has been a challenge. So, yes, we would be able to, as in Q1, have shipped significantly more volume, and that has been an impact on our business. It ultimately, as we would expect, you can't get reorders until the orders are filled, so it does have an impact on Q3 potentially as well when you have, later shipments in Q1 or Q2. So overall, I think that you're correct in saying it does impact us in terms of the potential revenue that will accrete in 2022. But within the scope of that, we are making all the changes that we've already talked about to try and address it and eliminate it as a going factor going forward.

Appreciate all your hard work, guys. Thanks so much.

Thank you. Thank you. Your next question comes from the line of Wayne Rain. Your line is open. Please ask your question.

Congratulations, Jeff and Kevin, and I sure admire you putting your heart into this company, and I hope we have continued success. I have two questions. Number one, do you feel that that chair you talked about is going to be significant for you? And could you elaborate a little on your cash position? And one more question is, do you feel like there's still more opportunity in the diagnostics deal? And thank you so much to both of you.

Well, thank you, Wayne. We'll take those in order. I mean, the cherry on top You know, that's still being worked through. Wayne's referring to the, and I was referring, Kevin, to the FDA changes to the monograph and the requirements that companies do more testing on chemicals-based sunscreens. I don't think that's going away anytime soon. We're still seeing the impact on the demand side of consumers saying, hey, you know, we don't necessarily want chemical-based sunscreen. If we can get mineral-based sunscreen, that works as well, which it has and is or better in a lot of ways. So I don't think that's nearly done. I think more of it's going to unfold. And this is just me talking. I think some of the producers are going to pull out of some of those chemicals because the testing regimes are either too cost-intensive for them to take up or they already know that there are enough red flags that, while maybe not acutely dangerous, some things they don't want to have to share. So I think that's going to be an annuity for a little while for us at least. In terms of the cash position, we're in pretty good shape. We have yet to draw on part of our new financing. We will be doing that this quarter. Got some room there. A lot of it is dependent on the growth and the speed of growth. As Kevin alluded to it, John actually, Henderson actually alluded to some of the inflationary issues. Some of these things are dragging out. and costing more than we planned. So on the one hand, each thing that we do is probably going to, on the capital equipment side, is probably going to cost more than we thought. But it's also going to stretch out and take longer and be less condensed than we planned. So hard to know for sure until we get a little further down the line. But our key focus is making sure that we could produce more materials. I think that one of the things that came up a minute ago that I didn't want to jump over Mr. Henderson was that the business we have now, you know, it's phenomenal that we haven't done any heavy marketing and business development really in a couple of years. I mean, COVID and our busyness helped that. So there's a lot of upside coming in the future. And one of the things that Kevin and I and the team here talk about a lot are you know, we want to be set up to be a production machine so that we can get, we're limited by the amount of marketing and sales we can do versus by the amount of product we can get out the door because that's, and I should say marketing sales and product development, which is critical both in existing customers, reorders. I mean, the growth we've had in our existing base has been great, and that's been a testament to strong products, good formulating, and all the other things we discussed. The last one, the question regarding the medical diagnostics. Maybe I'll let Kevin add a little color to that as we're going. We still view that as a good market for us. Yeah.

Yeah, we do view it, Lane, and thank you again for your comments, but we do view it as a good market for us. We are actively... in a very, I will say, very narrow basis working on developing that area. We had developed basically a step downstream from our original product positioning, and we're working very closely with one major diagnostics company on figuring out if that technology platform that we invented actually offers improvements in performance. That will take some time. The analysis takes time for us and that company to figure out whether there is potential. But we are still working in that area.

It's also worth mentioning that that market I mean, it was COVID-19 driven on the front end, and the fact that the PCR testing has become more of a fact of life, the demand is kind of unknown. We think it's going to keep going. It's going to be better than it was historically a number of years ago. A lot is really going to depend also what happens in the fall and spring, and hopefully nothing tragic, but hopefully something also that requires a lot more testing.

Yes.

Again, to ask a question, press star, then the number one on your telephone keypad. Again, it's star one on your telephone keypad. Your next question comes from the line of Rand K. from RKA. Your line is open. Please ask your question.

Good afternoon, gentlemen. Just a quick bookkeeping question. It's on net income and net income per basic share, there's just a line as opposed to loss. Does that indicate that it's just zero-zero even, no loss, no gain?

Yes. The $60,000 of income, it's a fraction of a penny below a half of a penny. It's It's terrible. Couldn't get the thing in Excel to flip over before we had to get the press release in from a dash to a zero. But yeah, should be a dollar sign and then a 0.00.

OK.

Thank you.

With the new product mix, will some of the seasonality lumpiness, and excuse that phrase, become a bit more of an even flow?

Yeah. Hi, Rand. Nice to hear from you. Just in terms of our product mix, one of the things that I don't know if we've ever commented about much, but the majority of our clients are buying products and selling products to consumers for facial care. And as a result, that is a less seasonal business than, say, products that are used for recreational use, like going to the golf course or going to the beach. So there still is some seasonality that's primarily driven by retail rhythms. You know, most of these larger retailers, or really all retailers, look to get the majority of their skincare products in an early Q1 period. So there is still some seasonality with new launches related to that, but less of it is based upon just the buying or purchasing rhythm of consumers for the products that our brand partners are selling in the market.

Okay. I'm impressed with the way you guys are adding resources, a lot in marketing, a lot in operations. My concern is that most of the hiccups that I've heard about, not only over the last couple of quarters, but over the year, have been fiscally oriented. And I'm wondering why hire a controller versus a CFO?

Sure. That's a good question. I think for the time being, I will still serve as the CFO with a controller that will be a high-level controller will be the goal. Some of that is also difficulty in finding people, but some of that is the fact that a lot of the doing, you know, if you look at it organizationally, a lot of the work that I've been doing is controller work. Some is accounting manager work, which really we need to get out of, and so we haven't had kind of the overview and enough time to do some of the analysis that we'd like to be doing. We've been more caught up in all of the regulatory requirements and other things that are, if you look at it, you know, the urgent versus important stuff, and I think a start is bringing on a controller. I definitely think over a period of time we'll need a CFO and we'll need more augmentation in the technology finance and accounting and the admin teams generally. I mean, we've got, you know, HR is varied as well, just given all the things we've had to do. But that's the logic is start, you know, one thing at a time and try not to, I mean, as much as we did add, one of the things we all hate doing is adding overhead. And so we're trying to avoid that while making the right decisions for what's best in the near and long term as well.

Okay, well, I appreciate it. It's just that in the course of the conversation, I'm hearing things like, you know, issues with material flow cost more than we thought. And, you know, it seems like everybody's got their arms full, you wearing a number of hats, Jess. And I'm just wondering if, you know, someone who has been a world-class CFO who's had the ability to peek around the corners and know what's coming, might not be money well spent.

That's a good insight. I think over a period of time that's going to be an ongoing discussion and I do appreciate the input there for sure because as we know, I mean, finance and accounting are the lifeblood of it. But kidding aside, I agree that the value is there and financial analysis. I mean, we also, cost accounting is also a big deal. There's just a lot of different, I don't know the number off the top of my head, but I mean, we went from, I want to say over several years, 10 SKUs to hundreds of SKUs. I mean, we have a customer that has more than 100 products. We have one inventory item where there's 8 million of them. And I think You know, five years ago, I don't think we had $8 million of anything in inventory. So it's just the flow has been fabulous. The growth's been great, but it's also been a lot of catch-up, and we finally got our finances in place and kind of rolling, and this is, you know, the growing pain feature is something that hopefully we'll have dealt with at least at this step in growth this year.

And, Rand, just to chime in relative to things like materials flows, et cetera, as Jess indicated earlier, and I think we've talked about, we are improving or working on improving and strengthening our supply chain team that further could augment some of that and really be looking into the crystal ball of cost specifically. and understanding really the materials management a bit better. So we're making those steps and taking strong steps toward having a world-class team there as well.

Well, I just would like to make one comment. I think part of the strength of what I believe this management team has is its ability to not only to look at its strengths but its weaknesses. And I think you guys have been remarkably forthcoming, and I appreciate that I have the opportunity to make suggestions and have you guys evaluate them without loss of confidence. But you guys have done a very, very good job, and I do appreciate it. Thank you, Rand.

Thank you, Rand. I appreciate that. I believe, I mean, we're both fans of transparency, and I try to, to the extent we can, you know, people are frustrated, and I get that. And actually, the history of our company has been not sharing customers, which has always been, you know, drives people crazy because you're talking about growth and things. But we try to be as open as we can about the things we can. Yeah.

Again, to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Jan Henderson from KTG. Your line is open. Please ask your question.

Hey, guys. Two quick follow-ups. Number one, you guys seem to be very upbeat about efficiencies in terms of profitability inflecting in the back half of the year. much better compared to, you know, what you're going through in the first half. What's the main root cause of that? Just kind of, you know, just running a tighter ship, you know, efficiencies coming into place. Is it partly due to new equipment? I mean, just a quick summary of kind of what will be the main drivers of kind of, you know, seeing profitability re-inflect.

Yeah, thanks, John. So, I think the two points you made are exactly it. We Tad Piper- talked about some investments that we've made last quarter and the quarter prior relative to increasing automation those are starting to come into fruition and that helps to reduce the per piece cost or per unit cost of. of our products without having to share that with anyone, particularly in the business we're in now. So that helps to improve profitability. And then just operational effectiveness. I think that's been one of the things that we've worried about a lot, that as we scaled the company, we didn't necessarily have all of the talent that I think we have now. And it's not the people not being talented, but just having enough of them. And so we are now getting to a place where we have enough talented people to help us really execute, as I mentioned, including a new manufacturing leader that's coming in in just a few weeks with industry-specific experience that we're pretty excited about as well.

Great. Thank you. And then final question on the competitive landscape. I know you guys are clearly taking share from all the companies that have been using various chemicals and various beauty products. What about kind of the other, I think in the past you guys have alluded to a couple companies that are doing hundreds of millions of you know, revenue a year, is it logical to assume that you're taking share from those guys as well? And can you provide the name or two of those competitors just so I can kind of do some research on them myself?

Yeah, so let me start by saying I think we are doing less share-taking and really taking a bigger piece of the growth. So, you know, one of the things I commented on was just the growth rate in the beauty industry in general is, you know, in excess of 30% on a retail sales basis. Actually, you know, a lot of that was unit volume increase over the prior 12-month period, which was March to March, was the comparison that the analyst was doing. So I think what we're really doing is capturing more of the growth than maybe others. I hate to give a lot of our competitors our time right now, but there are the typical contract manufacturers. that you would see out there. There are very large ones that have been around for quite some time, are the reference point that you would use if you wanted to look them up. And they are the alternatives, if you will. And again, not trying to overstate it, we are very unique. We are the only In fact, we're a fully integrated manufacturer of skin care and makeup products with SPF that is in the world as it exists right now. It is really part of our competitive advantage. And as Jess has alluded to earlier, we really need to continue to step on the gas to maintain that competitively.

There's also the piece of growth is, in addition, Kevin was citing the analyst's number, there's also a big growth in awareness. A lot of our customers for these Prestige cosmetics have not had UV protection in their products before. So that coming along really makes our segment of it even stronger than many of them because all of a sudden the opportunity is, hey, we've got to put something in. What should we find? Well, We've got something that's healthy, that isn't being challenged, that has been around forever, yet now it seems to be in a workable situation where it feels great and looks great. So there are a lot of reasons things are aligned in a good way for us right now.

Excellent. Thanks again. I hope you guys get some vacation time this summer. Me too.

Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Our last question comes from the line of Anthony Rubin. Your line is open. Please ask your question.

Hey, guys. Just a quick follow-up. I've just been mulling over Kevin's comment about pricing power, and Kevin, I was hoping you could expand upon that because there's certainly the ability to cover costs, but especially as you're in a supply deficit situation, in other words, the enviable position of demand exceeding your ability to supply, is there any opportunity to expand your pricing beyond costs? And kind of just as a related question, Can you share what your material costs are as a percentage of the products you go into, particularly from the Prestige Cosmetics perspective, whether it's as a percentage of materials or percentage of MRSP or MSRP, rather?

Yeah, yeah. Thanks, Tony, for that question. So let me first address the pricing aspect. So when we are building products or negotiating on building a product or supplying a product to a client, that pricing is done on a one-on-one basis. We actually don't have a standard price list. And so the reason is that virtually none of our products are truly standard, even though we have... These things we call white label products, they go into different types of packages with different amounts and et cetera, et cetera, et cetera. That makes each item have some uniqueness to it, and therefore it has a unique cost and it has a unique position. Our strategy is, on a pricing basis, is to try and capture a percentage of the product the suggested retail price, MSRP. I'm going to hold off on stating what that percentage is just in case there are folks listening. It isn't as big as we'd like it right now by the nature of this market. The market itself has had a sort of standard operating model where brands were expected to achieve a certain very high margin, gross margin relative to the MSRP. And so we are always bucking up against that. I think on average we are typically able to be at the top of that standard and in some cases even above it. So I think we do a good job on pricing, and because it's a one-off basis, if you will, and not a priceless, we do get an opportunity to be somewhat aggressive relative to how we end up pricing and what business we accept or don't accept based upon it.

Each sale is technically also a license. technology license, which we believe our technology is superior to what's out there. So you're not, it's not a complete apples and apples. If somebody says, okay, I don't want to buy Celestin. So I want to buy it from somebody else because Celestin costs too much. Well, okay. We understand. We don't like that, but we understand on the other side, we don't believe the other products are as good. And we have some technology that we continue to build on that, um, is ours and it will be ours for a long time. So that's part of this. It's a little different than a typical, you know, the question earlier about what are the other CDMOs in the marketplace. A lot of them have excellent operational skill and long relationships with big companies, but they don't all have special technology that's different, and we do.

There are no further questions at this time. You may continue.

Okay. Well, thanks, everybody. Thank you, Justin. I want to mention, you know, Tony's comments earlier, you know, sometimes we're so close to this, we don't always realize what you don't know as investors in terms of why we're investing and what our expectations are, and I apologize for that. I think that's something that we'll make an effort to make a little more clear in terms of building out expectations if if not in a concrete detailed sense at least at a high level saying this is why we're doing what we're doing because we see these opportunities things are really exciting right now we're at a point where we're the ones in control of our future valuation we believe we've got great products that people want we're financed well to reach the next level and we need to decide at what pace we grow let's see what we can do so we're looking forward to the opportunity to discuss the business with you again next quarter And thank you again for being here and for supporting our exciting companies. Everybody have a great day.

This concludes today's conference call. Thank you for participating.

You may now disconnect.