Nanophase Techs Corp

Good day, and thank you for standing by. Welcome to Nanafe's third 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'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. The words believe, expects, anticipates, plans, forecasts, and similar expressions are intended to identify forward-looking statements. Statements contained in the news release that are not historical facts or 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 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 and 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. Mr. Justin Kowalski, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Norma. Good morning to all of those listening live. Welcome to those who choose to listen later online. Thanks for joining us today for our discussion of our third quarter 2023 results, the state of the business, and our outlook for the rest of the year going into what we plan to be a watershed 2024. Kevin Curitan, our Chief Operating Officer, is joining me on the call today. I have some brief prepared comments, and then Kevin and I will have some time for some Q&A afterwards. While our results are not yet reflecting it, we're in the process of implementing several things that we expect to return positive financial results in the near term. We've added to our operations team, first with the VP of manufacturing that we added in Q2, now with an experienced senior purchasing manager this month who, in addition to having relevant and broad industry experience, has also built a purchasing organization from the ground up in a company with similar growth to what we've seen over the past few years with our Celestis business. That perspective and experience is something we've been missing that we expect to profit from almost immediately. We mentioned in the release that Q3 was impacted heavily by supply chain issues, most related to purchasing and production planning, where we couldn't get everything aligned efficiently enough to deliver on our volume commitments. Barring existential events, we don't expect to have to deal with these types of things in 2024. Given that much of our funding has been through the financing of working capital, low shipping volume leads directly to cash crunches. That leads to inefficiencies, operational compromises, and temporary losses of negotiating leverage. These things have been a struggle this year, beginning in Q2. Another way we've addressed these issues is through the renegotiation of our existing loan facilities and the addition of a modest amount of equity capital to give us some flexibility. We're also in the process of securing some additional financing for capital equipment as needed. We have received or will receive an additional $3.2 million in cash over the next several working days. $1.2 million of this will be through an expansion of our revolving credit line secured by inventory. We now have excellent terms on both our inventory and accounts receivable revolving lines through the support of our largest shareholder. The terms we have, which you can see in detail in our 10Q, are significantly better than we believe we can get elsewhere. This has been a nice benefit to us and helps us to focus more on the metrics we need to meet or exceed to help us to achieve our ultimate goal of increasing our enterprise value. The remaining $2 million in financing will come from a shareholder rights offering that we are in the process of implementing with an S-1 to be filed soon. At a high level, we'll offer 5 million shares of stock to our existing shareholders only at a price of 40 cents per share. Each shareholder will have the right to purchase this Nanophase stock based on their ownership percentage. The pro rata calculation amounts roughly to the right to purchase one share of stock for every 10 shares currently owned. We built in an over allotment feature that will allow the purchase of an additional 60% of the pro rata amount of shares if desired. The principle here is that we want all of our shareholders to have the opportunity to avoid dilution while supporting our forward growth strategy. Recognizing that our stock is thinly traded, this will represent an opportunity to maintain or enhance your position in a single transaction at a fixed price. Our largest investor has agreed to serve as a backstop to ensure that the entire 5 million shares are purchased. So, if the other shareholders do not express interest in purchasing their allotments, Mr. Whitmore will purchase the remaining balance. He has also agreed to extend the company a $2 million bridge loan against the proceeds to allow us immediate access to this capital. This was funded yesterday. The critical goal here is to head into 2024 primed to deliver more value through increased gross margins, reduced operating costs, and a more sustainable infrastructure. We're definitely driving Celestin's growth, but Enabled by the equity financing, we're planning to do it with a greater degree of security as we navigate the inevitable cyclicality of our business. This is all the more important because we don't expect our Celestin's business growth to slow for the foreseeable future. We're positioning ourselves for a strong 2024 with our primary focus to be enhancing profitability and efficiency. The growth will continue, and we've shown we can accelerate it further when the time is right. The last step toward building our value is profitability. Before we continue, let's walk through the numbers. Unless identified otherwise, all numbers will be stated in approximate terms. Our Q3 23 revenue was $8 million versus $9.7 million for the same period last year. For the third quarter of 2023, we had a net loss of $1.4 million, or $0.03 per share, versus a net loss of $0.8 million, or $0.02 per share, for the same period in 2022. Looking at the nine-month comparable numbers, We had 29.3 million in revenue in the nine months ended September 30th, 23 versus 29.1 in the same period in 22. For the same nine months of 23, we had a net loss of 2.3 million versus a net loss of 0.6 million for the same period in 2022. Much of this poor performance in 2023 relates to our extended struggles with getting product out the door, often due to external supply chain issues and internal bottlenecks. As I mentioned last time, Most of our external supply chain issues have been resolved. With the addition of our new purchasing manager and the VP of manufacturing, who was just promoted to VP of operations in October and is just hitting his stride, we think we'll get the last of the internal issues resolved this quarter. An added benefit our enhanced purchasing function will provide will be the reduction of our direct material costs through more aggressive negotiation and attention to discounted pricing programs available through many suppliers. The added capitalization will help here too. While gross margins are disappointing, a big contributor to that for Q3 has been that we couldn't get enough goods shipped due to planning and logistics, not lack of demand. So we weren't able to absorb overhead. We've seen some very strong labor utilization and throughput numbers with our new equipment over the past few months and expect that to contribute to enhanced margins as we get the organization running more efficiently. Moving down to P&L, Third quarter R&D and SG&A expenses combined were down $400,000, or 12%. We're currently spending a great deal of time internally to optimize our bang for the buck here and expect to report on further progress at year end. Looking at the nine-month expenses, if we back out the BSF litigation expense, SG&A would have been down 9% year over year. While we're continuing to incur expenses relative to the litigation with BSF, Legal expenses were down to less than $150,000 for this past quarter. We spent roughly $1.2 million here during the nine months ended September 30th, with almost 90% of it distributed almost equally in the first two quarters. We also spent approximately $400,000 in 2022 on this litigation. We continue negotiating with PSF in good faith, with an ideal outcome being a negotiated settlement. Litigation is still a possibility, and we continue to think we have a good case if things go in that direction, but the goal remains to resolve these issues with BSF as quickly and fairly as is practical. We also saw a nine-month interest expense almost triple, a $375,000 increase from the same period in 2022, due to the combination of expanded borrowing and a five-plus percent increase in the prime lending rate over the past year and a half. Well, this call has been focused on operations, we wanted to offer a few updates on the commercial side. These are the reasons that we all remain optimistic about 2024 and beyond. In the release, we said we left September with about $19 million in open and shipped orders on the books. Since Friday, we have three plus million more orders for 2024 booked, bringing confirmed POs in total for 2024 to over 13 million. Total remaining orders for 2023 are about five plus million in addition to four million being shipped so far. Total customers exceed 60, with approximately eight of those companies purchasing greater than a million dollars in products from us, and another half dozen purchasing greater than 500,000 in products from us. This leads to a more robust pipeline from which we expect further growth in addition to new or growing customers coming in for 2024. While we're not thrilled with 2023 bottom line performance, we continue to get excellent customer feedback. This is where we build a one-two punch. We fought most of this year to get ourselves a better footing for profitable growth in 2024. Along with growth, we've been focused on increasing our margins, but entering 2024, increasing our margins will be our primary focus. It's all about building value in the near term, which we know will lead to even more value over the next few years after that. We're all investors in nanophase and coalescence, and we all stand to reap the rewards we're working toward together. Why don't we get right to your questions? 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 feedback. After work, I'll offer a few closing comments. Norma, would you please begin the Q&A session?

Thank you. As a reminder, to ask a question, you'll need to press star 1-1 on your telephone. To withdraw your question, please press star 1-1 again. Please wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from the line of Barry Blank with DH Darby. Your line is open.