Nanophase Techs Corp

Good day and thank you for standing by. Welcome to the Nanophase second quarter 2023 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 during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. The words believes, expects, anticipates, 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 provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect the company's current beliefs and a number of important factors that 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 relationships, 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 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 conference over to your speaker today, Jeff Jankowski, President and CEO. Please go ahead.

Thank you, Abigail. Good morning to all of those listening live, and we also welcome those who choose to listen later online. Thanks for joining us today for our discussion of our second quarter 2023 results, the state of the business, and our outlook for the rest of the year. Kevin Keraton, our Chief Operating Officer, is joining me on the call today. Our prepared comments will be brief, and as always, we're looking forward to some good Q&A afterward. Our second quarter was much stronger than the first, but still beneath our expectations when entering 2023. While there's definitely room for improvement, there's also definitely room for optimism as we assess our performance. On the last call, I mentioned that margin improvement and profitability are a major focus for the company. We discussed the plans we've put into place, and I told you we expected to see at least a 2% improvement to gross margins this year. With that commitment in mind, it was gratifying to see the 31% gross profit in Q2 and also to see the improvement compared to the prior year's Q2 and the six-month numbers. These numbers are even better when taking into account that we had more than $400,000 in other revenue in Q2 of 2022, which added about 4% to the quarterly margin last year and 2% to the six-month margins. If we pull this other revenue out, which practically represented all profit, year over year we saw a 4% improvement in gross profit for the first half, even after a historically tough Q1, and an 11% improvement over the second quarter. We continue to struggle with unsteady customer demand, which, while continuing to grow, pops up and down month to month. This makes it challenging to predict future margins over short windows like a three-month quarter. We've also historically struggled with getting product out the door due to external supply chain issues and internal bottlenecks. The good news here is that most of our external supply chain issues have been resolved. We've also seen some nice productivity improvements coming online recently, which will help to reduce internal bottlenecks. Kevin will touch on this during his comments as well. Moving down to P&L, It's also important to recognize that we're incurring expenses relative to the litigation with BSF that we believe will not reflect ongoing operating expenses once we resolve the open issues. We spent roughly a million dollars here during the six months ending June 30th, distributed almost equally in the two quarters. That comes to a bit more than two cents per share and were these costs not incurred, we'd be looking at a profitable six months and about a 7% net income for Q2. We did incur these costs, however, and we will continue down the path we're on, ideally to a negotiated settlement, but not necessarily so. We think we have a good case and continue to work to resolve these issues with BSF as quickly and fairly as is practical. We're approaching this situation in light of our view that nanophase and coalescence promise a great deal of unrecognized value that we intend to realize. We need to protect that value and ideally help to expand both our active pharmaceutical ingredient or API business with BASF by adding new products, which remains an ongoing discussion. We will also enhance that value by driving more growth through the expansion of our Celestis business. Before we continue, let's walk through the numbers. Unless identified otherwise, all numbers will be stated in approximate terms. Our Q2-23 revenue was $11.9 million versus $11.2 million for the same period last year, up 6%. At $11.9 million, Q2-23 also represents the highest quarterly revenue we've ever recorded. A few short years ago, $12 million would have represented a pretty good year for your company. As an additional point of reference, Q2-23 revenue exceeded Q1 revenue by 25%. For the second quarter of 23, we had a net income of $337,000, or a penny a share, which represented a multiple of 2022 second quarter earnings of $50,000, coming in at well less than a penny a share. Looking at the six-month comparable numbers, we had $21.3 million in revenue in the first half of 2023 versus $19.4 million in the same period in 2022. This represented a 10% improvement year over year. Also, when looking at the strides made since 2022, note that we had a good deal of other revenue that came from sources not directly related to product revenue, which is our core business. Looking only in terms of product revenue growth, the 6% improvement in Q2 goes up to 10%. Taken the same way, the increase for the six-month period goes from 10% to 12%. These are good indicators of where our business is headed and how we plan to strengthen it going forward. Our ongoing challenges are to balance production resources to demand and to continue to increase throughput to help reduce our reliance on overtime and to avoid having unabsorbed direct labor during periods of waning demand. We've been having success in addressing these things. As we mentioned in the release, we recently commissioned our first fully automated filling process, enhancing throughput per labor hour by 100%. We continue to work to automate more of our processes where demand can support it, with expectations that this will bring benefits not only in enhancing our ability to deliver, but also to reduce costs. Keep in mind that even without the additional automation, we're still producing at record levels. As we get our new manufacturing organization humming, we'll continue to deliver on opportunities to produce more efficiently and profitably. We're in a good spot. As I mentioned last time, we're highly focused on increasing our margins, knowing that this will yield significant increases, first in profitability, then to our enterprise valuation. We're all investors in Nanophase and Celestins, and we all stand to reap the rewards we're working toward together. Looking now at operating expenses, we saw R&D expense, which includes our engineering group, while down a little from Q1, was up 35% year over year. Roughly half of that increase was related to compensation expense. An important part of this came from the expansion of our engineering team to help speed the build-out of capacity in our new Bolingbrook facility. These types of additions will pay for themselves. The rest of the R&D investment in people is to support the continued enhancement of our technology, our intellectual property, and ultimately, our highly rated line of award-winning innovative products. We operate in markets, particularly with respect to our Celescence business, where new products drive growth, and product life cycles can be fairly short. We've made remarkable progress since we started developing and marketing our formulated products, and we're working to maintain the advantage we have. Moving to SG&A expenses, which were also down sequentially from Q1, we were up just over a million year over year to about 4.3 million for the six months of 2023. Of this increase, the lion's share related to the million dollars in BSF litigation costs we incurred this year. Again, we don't expect these to be ongoing expenses. Also contributing to this variance were smaller increases in compensation expense, insurance costs, and audit fees, offset by reductions in bad debt expense and other items. We also saw interest expense more than triple, a $280,000 increase from the same period in due to the combination of expanded borrowing and a 5% increase in the prime lending rate over the past year or so. As you can see, we keep moving ourselves into a better position to win. We've maintained our focus on capturing the bottom line benefits that the changes we've implemented beginning in 2022 were designed to deliver. The bottom line takeaway here is that we're focused, motivated, and working hard to build the value of our company. Now I'd like to introduce Kevin Kurathan, Chief Operating Officer, to discuss progress in some of these areas and their drivers in greater detail. Kevin?

Thanks, Jeff. As always, I would like to begin by thanking our team for their efforts in helping fulfill our mission in enhancing people's lives through the world's best skincare products, as we also work tirelessly toward creating a more valuable company for our shareholders. I also would like to thank all of our investors who remain steadfast in their support of our company. While it was nice to return to profitability in Q2, it by no means represents a finish line of any sort. Instead, Q2 represents us starting to realize our goal in achieving both growth in revenue and increased profitability. A critical part in achieving our goal is having the right team in place. We now, for the first time since we began the Celestin's business, have a complete leadership team in place in commercial, operational, and financial roles that will serve as the team to lead us into the future. We have already demonstrated that our business processes enable us to sustain our status as a world-class innovator. Our latest Cosmoprofit Award really reinforces that. That is why we are increasingly focused on building the business processes that will enable us to become a best-in-class manufacturer and distributor. As our board often asks, how will this translate? What are the KPIs that will demonstrate that we are on track with achieving our goal? Achieving operational excellence translates into meaningful improvements in gross profit margins. Over the next two quarters, that will primarily be through improvements in two key areas, our labor efficiency and lowering materials costs. While 31% growth profit was certainly a significant improvement over the underperformance we had in the previous quarters, we believe there is much more improvement that can be realized in a relatively short period of time. I'll end my comments by saying that our confidence in the future, again, is largely because of our confidence in our team's ability to achieve our mission, continued innovative leadership while simultaneously growing our profitability. They have the right stuff to achieve our vision, but, of course, that must be proven during the rest of this year and the years to come. Jess?