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.