Nanophase Techs Corp

Thank you for standing by and welcome to today's program entitled Nanophases First Quarter 2024 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 this session, you'll need to press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. 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 these news releases. 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 or new events, and or uncertainties. I'd now like to hand the call over to Jeff Jankowski, President and CEO.

Thank you, Jonathan. Good morning to all those listening live, and thank you to those following up online after the fact. We're looking forward to discussing first quarter 2024 results, our performance to KPIs, which will play a huge role in ensuring our success, and our outlook for the balance of 2024. Kevin Keratin, our Chief Operating Officer, is joining me on the call today. We have some prepared comments and will be available for some Q&A afterwards. We'll continue to focus on our future, which we believe to be a bright and lucrative one, reviewing the things we've done to position ourselves for this, as well as covering Q1 2024 results. We had lots of news during the first four months of 2024, which, while not operational in nature, we certainly expect to contribute to our success going forward. We closed two equity financings in Q1, which were critical for us to keep growing and supporting both our expanded working capital requirements and some modest capital projects needed to support additional Celestin's volume. None of us wanted to have to walk away from profitable growth, which had been a steady pressure in 2023. Now we're able to continue to add good business with improved throughput while also reducing our cost per unit through automation. We're focusing primarily on enhancing profitability via gross margins this year, but the growth keeps coming and we want to capture it. Given the nature of the Celestin's business, success leads to growth within existing customers as sales grow and as they launch new product lines. Success with these customers also results in more opportunities for new business. Other brands don't want to be left behind as we all work to satisfy demand in this relatively newly defined market, A market we believe Celescence has been instrumental in creating and energizing for prestige cosmetics offering natural, minerals-based skin protection. Another key milestone achieved just two weeks ago was the successful settlement of our litigation with BASF. As I mentioned, our respective commercial teams have maintained a positive relationship through the entire process, and we're looking forward to our full focus being available to running our API business with BASF and our solescence business. The added management bandwidth, with that added management bandwidth, we'll be able to apply to our nanophase and solescence businesses will allow us to increase our focus and accelerate progress in the strengthening of our enterprise and increasing its value. Now, let's walk through the numbers. Unless identified otherwise, all numbers will be stated in approximate terms. We had good results in Q1. generating a 36% gross margin on $9.9 million in total revenue compared to a 23% gross margin over the same period in 2023. We also generated almost a million in net profit in Q1 of this year compared to a $1.2 million net loss in Q1 of 2023, more than a $2 million swing. Our margins were driven largely by a favorable Q1 product mix and a continuation of the gains we've seen in improved production efficiencies. We'll need a few more quarters under our belts to better understand all of the factors contributing to this, as we've yet to develop enough history to allow for more accurate future predictions. Generally, the 35% to 40% gross margin range follows our 2024 plan. R&D expenses were down about 10% year over year, while SG&A expenses were down 28%, or almost $600,000. about two-thirds or 400,000 of the decrease in SG&A related to a reduction in legal fees for the recently settled litigation. Our Q4 2023 reorganization also contributed to these savings, which we expect to continue through 2024. Last time, we addressed some of the changes we're implementing in manufacturing that we expect to deliver improved results and increased capacity in 2024. In a few minutes, Kevin's going to address our operating KPI performance, some of which will be enhanced by these investments. They will require a total of approximately $2 million in capital to implement, and we expect them to pay for themselves within 15 to 30 months from commissioning. We broke these out into three projects. First, we're building out our own microbial testing lab. This will allow us quicker turnaround times on required testing of every batch we make as well as reducing outside testing costs significantly. We expect to save approximately $300,000 per year at current volumes and have this project paid off in just over a year. Second, we're transitioning our wet processing lines to our Bolingbrook facility. This will result in at least $400,000 per year in savings and pay for itself in 30 months or less. Critically, in addition to hard dollar savings per unit, This will help us to increase throughput, helping us to support greater demand while increasing customer satisfaction. Lastly, we're further expanding our filling and assembly operation in Bolingbrook, adding more automation and allowing for increased volumes to be produced in less time than it takes today. We expect this project to pay for itself in about two years in terms of hard cash savings. It will also create more opportunities for greater sales growth and enhance profits. Combined, once these projects are completed this year, we should be able to support about $100 million in Celestin's finished products with what we've put in place. This will represent a solid, stable base from which to more than double the size of our existing business within our current footprint. Celestin's products made up over $8 million, or 82% of our Q1 2024 sales, versus $5 million, or 53% of Q1 2023 sales. The demand is here. Now, I'll invite Kevin Keratin, our Chief Operating Officer, to share his thoughts on our progress to KPIs and the approach we're taking through 2024. Kevin? Kevin Keratin Thanks, Jess.

As usual, I'd like to begin by thanking our teammates who every day demonstrate that we are indeed best in industry at what we do, and our investors who continue to trust our leadership as we take the next steps on this journey. I would also like to thank the families of our teammates, as we ask a lot of our team, and we would not be able to do what we do without the energy and support of our loved ones. Last month, we introduced three key performance indicators that we will reference throughout this year to provide guidance on our performance. These KPIs are inventory availability, throughput, and on time, in full, or ODIF. As we noted last month, when combined with our financial analysis, these KPIs help give us a clear assessment on how we are performing and line of sight to the actions we need to take to continue to move our company on the never-ending path toward operational excellence. As a result, we refer to these as operating KPIs. In addition to operating KPIs, our company also has growth KPIs. These KPIs are important indicators on how we are performing relative to our growth goals, and therefore how we are trending toward increasing our overall enterprise value. While currently providing strong indicators for growth, it is premature to talk much about these at this point in the year, except to say we will introduce and discuss them in greater detail during our Q2 conference call. So let's get started on reviewing our operating KPIs. We will begin with inventory availability, which last month I described as being a measurement both of the amount of materials we have on hand and the timing on when we receive those materials. During Q1, we were able to finish the work that we had started in late Q4 to bring our inventory availability to over 95%. This milestone means that we have effectively addressed virtually all materials availability issues that have been the primary drag on our performance during the second half of 2023. I would like to commend our purchasing team as well as our R&D team on their collaborative effort to bring us to this point. Through working tirelessly together to identify and qualify alternative suppliers and producers of key raw materials, These teams brought us through several tight spots to reach this current milestone. Further good news is that over the past month, we have sustained this performance in maintaining inventory availability at or above the 95% level, and we are confident in our ability going forward to continue this solid performance. To further augment our position, our team is also working hard on implementing our vendor development and management programs. which includes, amongst other elements, bringing in additional qualified sources from around the world for key materials to minimize our out-of-stock risk and reliance on single source suppliers where it's possible. This work has already yielded some small but still impactful improvements in purchase price for these materials, due both to volume growth and getting the alternative sourcing. While we still have many miles ahead of us, we are pleased with the progress we have made and confident in the professional management that is being executed to continue to move us toward best-in-class performance in this area. Our next KPI is throughput. Last month, I described this KPI as measuring how we perform relative to leveraging our assets to produce the goods we sell. More simply, throughput is a measure of exactly that. the output from our company as measured by the units of finished goods and the dollars of shipments we yield every week. During Q1, as inventory availability improved, it enabled us to improve our throughput, which, while lagging the improvement in inventory availability, increased each month during the quarter. More specifically, throughput measures progressed from 50% of target in January to over 90% of target in March, yielding a Q1 average of around 76%. To provide a little more context on this performance, consider that due to the strength of the improvement in throughput during the quarter, March alone represented 40% of our total production and revenue for Q1. An additional strong indicator of further improvement in throughput was seen in our upstream production of bulk for the finished goods we produced. At the bulk production level, we are meeting 100% of plan requirements or 100% of throughput by the end of March. We still have some bottlenecks in fully realizing the benefits of some of our investments on the secondary packaging area and are hard at work in rectifying these issues. It will be important for us to address these issues so that we can achieve Q2 throughput requirements, which for guidance are greater than 30% higher than Q1. Finally, turning our attention toward OTIF, there will be no surprise for the manufacturing folks online that OTIF lagged when throughput lagged. Remember, again, that we define on time in full, or also referring to OTIF or OTIF, as a percentage of orders shipped consistent with the dates we've agreed upon with our brand partners. Relative to our standard, we were less than 50% of our ODIF target. Our company goal remains to significantly approve ODIF into greater than 90% by the end of Q2. A very large and stretched goal for us, I might add. But we are confident that as we execute Q2, we will be on target with this objective through improving the throughput performance. Finally, as we noted in our last call, our company is fully able to handle hard better. It's foundational to the journey and the massive change we have made to our company over the past few months, let alone the past few years. Through continued focus on the measures and the development of our teams and teammates, we have solidly regained our footing. Our challenge remains to continue to raise our expectations to embrace these significant opportunities ahead and raise our performance at the same time over the coming months so we turn them into profitable growth. Back to you, Jess.

Thanks, Kevin. As you can see, All of this reflects progress along the strategic course we charted some years ago when we launched Solescence. We believe we've put ourselves in a position to win, and we intend to capitalize on that. We have more than $40 million in shipped and confirmed sales orders through this week, and we expect more to follow. Demand has not been our issue. Our struggle to supply that demand for our Solescence products has been our biggest limiting factor over the past few years. We expect to overcome that last hurdle this year. Now, we'd like to take any questions or hear your comments on our results. While we know that most of our investors listened to the webcast or reviewed the transcript after the live call, we're happy to invite those of you participating live on today's call to ask any questions you may have or to share your feedback. Afterwards, I'll offer a few closing comments. Jonathan, would you please begin the Q&A session?

Certainly. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 1-1 on your telephone. And our first question for today comes from the line of Ron Richards, individual investor. Your question, please.

Well, hi, Jess. Not such a bad quarter. I'm not sure you can answer this question, but what were the general terms of the settlement with BASF?

Hi, Ron. Well, at a high level, we are not stopped. We've agreed between us that we will continue to develop our Celestis business and that that won't be any sort of a violation of our agreements and that we will work, that we will be sure that we keep a supply available as mandated by the contract. And we've kind of cleaned that up to make that a little more clear as well as we've agreed, as we had been, to continue to work on new products for them. And there's a specific product in the pipeline that we said we would go ahead and move forward with. So in a broad sense, those things were, we codified some of the things that we had been doing, and we kind of assuaged each other's concerns about some other things. And in the grand scheme, I think, we're going to move forward. It was a successful settlement for both of us, and I'm certainly glad to be able to focus more of my attention, and I know Kevin can say the same, on the business at this point.

Were there any monetary aspects of the agreement? Payments?

No. No. No, there was nothing beyond just the agreement on those things. And we filed, I mean, you can get a sense of it if you If you felt like you were missing the experience of a root canal, you can go through the documents we filed and get a sense of it. But, yeah, there were no monetary inducements.

Okay. Well, good. Sounds promising.

Thank you. Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone. And our next question.

comes from the line of Tony Rubin, individual investor.

Good morning, gentlemen. I've been waiting a long time to say this, but great quarter. Congratulations. Thank you. It's good to hear that you're able to execute on the promises, so it's very exciting. So just as a follow-up to the previous caller, I did try to get that root canal and read your documents. But honestly, it was more than my mind could handle. But from your summary, it sounds like it's business as usual. It sounds like there's nothing negative to nanophase, which frankly leads me to wonder why there was all this litigation in the first place. But just wanted you to confirm that was correct. Secondly, how much was litigation for Q2 through four in 2023? So we could see that as a saving. Then your growth margins are obviously a tremendous improvement. And I think in the opening comments, you mentioned targeting 35 to 40% for full year 2024. I just wanted to confirm that. And you did mention $40 million in backlog. So is that primarily Celestin, or is that everything? So those are just really my questions. But again, really, I'm very tickled with your results. Congratulations. I know there's a lot of hard work. I know there was a lot of negativity. You had to go through probably some of that from this point.

audience but uh it's great to see that you're able to execute and uh again congratulate well thank you thank you tony um regarding the bsf um i need to get those numbers together i know that the first quarter number of 2023 was about 500 000 and it was the biggest quarter of the entire experience with um with the litigation and in total For last year, I think we were at around $1.6 million, but I'm not sure if that doesn't include the last quarter of 2022. The suit was filed in August of 22, and legal fees started, as you would imagine, about two minutes later. So I'll get that information together later. But, I mean, essentially, you know, we're in the million range for the rest of the year. Actually, our controller is sitting here and is putting the numbers together. So while he's doing that, I would say that in terms of business as usual, yes. One specific key criticism – Okay, our total for 2023 was $1.3 million, and for 2022 was $0.4. So $1.7 in that period, so call it $800,000 in the last three quarters of 2023. And I'll get that for next time as we talk about it. I'll make sure I'm pulling that out, calling that out as the piece of the improvement. In terms of... whether it's same old, same old. I would say in the one thing, we were unable to deliver as quickly as BSF wanted in 2021 and parts of 2022. And that had to do with a lot of things, including the COVID response and all the stuff that happened relative to supply chain. But those things were part of the things that we have made some guarantees on making sure that we will not only do better, which we would want to do anyway as part of our business, but also that we will be more transparent with each other on what our inventory is, what their need is, et cetera, which is something that we should have done a long time ago. And I think it's just bringing this whole thing to a head, push that in that direction. So that was one thing. Developing the new products, we've always been interested in helping them build that business. And I think codifying that probably helped them. Internally, I don't want to comment anymore on that piece. But yeah, I don't think from the perspective of where we see the business going and growing, I don't think anything is going to change from where we were in 2022. And our Our fervent hope is that the business for APIs takes off. The demand is strong there. The business for sunscreen, for non-cosmetic, the non-prestige business, which is a lot of the API business we do, has been hit lately. So that's contributed probably to the angst over all of it. But the market in total is still growing, and minerals are still the area that everybody wants to be in. From that perspective, I see that as being solid. Regarding your question about the margins, part of the reason I wanted that out there also is that we're still a really small company with big things that can impact the margins in a huge way. If you notice, for instance, we built a fair amount of inventory in Q1. not to bore anybody who doesn't understand cost accounting out there, but essentially if you don't consistently hold that inventory level or on the build, when you sell it, you take a hit for the overhead absorption coming back through. I have a feeling the number is going to be fluid, but we think relative to getting through the year, that 35% to 40% range is what we've targeted. I think we'll be able to get there barring just The biggest challenge, I think, has been relative to financial results, I think kind of lumpy demand. You know, we had some issues that we've addressed in terms of getting things out the door when we can. But we also have the nature of a quickly growing business with new customers, quickly growing customers, and they have their share of demand. of those challenges. One of their challenges that we probably discussed more in 2022 than in 23, because 23 challenges, we had our own contribution to them, is that for the business that we do that's not what we call turnkey, meaning that the customer supplies the packaging and labels and all the components, there have been a lot of holdups here and there on that as well. In some cases, you've got customers that may be existing companies that are relatively new to this market in particular. That all adds to the lumpiness of it. My greatest wish always is that our revenue grows every week and the weekly volume stays flat or grows every week, which we can't always have. I guess that's my disclaimer on whether we hit 35.1 minimum in every quarter, but that's the range that we expect to hit and steady volume has something to do with that. With that, I'll hand it over to Kevin to discuss your question on the $40 million backlog and where that's at.

Thanks, Tony, for your comments. Just to try and put it in perspective, the number that Jess mentioned, the $40 million plus, is a mix of what we've sold plus what is still to be sold. So, it's what we would call shift and open orders. The backlog, you can do the math pretty quickly and come up with as of the end of the first quarter, since it was roughly 10 million, that means that we were looking at 30 million plus in open orders as we entered into this quarter. The one thing to make sure it's clear is when we talk about backlog, it's a common term that's used in industry, but it isn't backlog as in, hey, we didn't ship all the orders and therefore these folks are waiting. There are actually orders into Q3 and Q4 as part of that number. The great majority of that number is for Q2. But there are some significant orders for Q3 and Q4 that we already have on hand. And then your last question, is that Celestins or is that everything? It is everything. Celestins is roughly 90% of the company now in terms of revenue. You know, 80% maybe more correctly is what we expect for the year. So it's mostly Celestins, but it does represent all of the business.

Thank you. And as a reminder, ladies and gentlemen, once again, if you do have a question at this time, please press star 1-1. And this does conclude the question and answer session. I'd now like to hand the program back to Justin Jankowski for any further remarks.

Thank you, Jonathan. We all really appreciate your engagement. We're building something that we expect will be profitable for all of us, will make people happier and healthier, and we expect will outlast all of us on this call. We're positioned to deliver, and we're expecting a good year. Thanks for joining us today. We look forward to our next call. In the meantime, we have a lot to do, but the pieces are falling in place and our expectations are high. I hope everyone has a solid day and can take a few minutes to enjoy the good news we've shared. Thank you, everybody.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect.

Good day. Thank you. Yeah. Thank you. Thank you. Bye. you you Thank you for standing by and welcome to today's program entitled Nanopharmaceuticals.