Nanophase Techs Corp

Good day, and thank you for standing by. Welcome to the Nanophase Technologies Corporation's second quarter 2024 earnings 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 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 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 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 felons 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, Jess Genkowski, President and CEO. Please go ahead.

Thank you, Shannon. Good morning to all those listening live, and thank you to those following up later online. While we're rolling, we had a strong Q2 following a strong Q1, and we've got our foot on the gas working to make 2024 a record year for nanophase and solescence. Kevin Curitan, our Chief Operating Officer, is joining me again on the call today. We have some prepared comments that will be available for some Q&A afterwards. Q2 of 2024 saw us with quarterly revenue of $13 million. For the first half of 2024, we had almost $23 million in revenue. To put this in perspective, $23 million in revenue for the first six months of 2024 is 33% more than our $17 million in full-year 2020 revenue, which was a major milestone at the time. We believe that second-half revenue will exceed the first half, with the potential for us to achieve more than $50 million in revenue for the year. With upside, we can do better than that. Before I walk you through the numbers, I'm going to spend a minute describing our business at a high level. We've had several investors asking questions about this, and I want to be sure that we bring clarity to the story. The better we understand it, the more exciting our progress is. Nanophase and its wholly-owned subsidiary, Solescence, are almost two sides of the same coin. Nanophase is an FDA-regulated manufacturer of bulk pharmaceutical ingredients. These active ingredients serve as the backbone for everything both companies do. We started with an active ingredients business in Nanophase, providing the safe and effective UVA and UVB protection found in minerals-based sunscreens through BSF. This market grew significantly in the late teens and into the early 20s. There was a limiting factor in the growth of minerals-based sunscreens, however, and that was the whitening effect of most zinc oxide additives. Our initial claim to fame was that our coated zinc oxide active ingredient, which we exclusively supplied to the market through BSF, was superior to other materials-based ingredients, minerals-based ingredients, I should say. This continues to be a good market for us, as BSF continues to be a good partner in that market. In 2016 and 17, we realized that we needed to take a new approach to capitalize on the growing demand for minerals, particularly for zinc oxide in the market for daily wear and functional cosmetics. Dr. Harry Sarkis, along with a cast of talented scientists, was able to take our particle performance beyond the next level. We developed the Celescence technology to allow larger zinc oxide particles, referred to as non-nano in the industry, to be incorporated into various lotions without exhibiting what is referred to as ghosting in the market. We then built a formulating team with solid industry experience to help us to show cosmetics companies, which we refer to as brands, to see the benefits of Celestin's technology. By enabling very uniform and flexible particles, then a series of methods by which to disperse and formulate with them, We were able to create finished Prestige cosmetic products that had the functionality of sunscreens built into everyday cosmetics. We found the holy grail in a respect. People getting ready for their day would be able to know they were getting protected against UVA, UVB, and other skin damage, which everybody wants, but by a product that otherwise seemed just like the high-end cosmetics they would typically use anyway. Coupling this massive advancement with the consumer trend against chemicals-based UV protection, along with the FDA's repeated assertions that minerals are proven safe for use, whereas chemicals-based absorbers lack such public proof, we hit this market at an excellent time. We took our FDA compliant practices, which presented a barrier to entry for many potential competitors, and with whom many were unfamiliar, Many of the FDA-compliant practices, I should say, were unfamiliar to our Celessence customers and coupled it with 25-plus years of experience making safe, minerals-based active ingredients. We created a value proposition that is only just starting to show its true potential. Celessence sells through brands, not direct to consumers. This means you'll rarely see mention of Celessence in brand advertising or on packaging, but we are the enabling feature of the products our brand partners sell. That was a quick summary, I know, but we wanted to take a few minutes to ground our new investors, potential investors, in why we've been so successful and as a refresher for everyone else. Okay, now let's walk through the numbers. Unless identified otherwise, all numbers will be stated in approximate terms. We had a strong second quarter with $13 million in revenue, a 32% increase over first quarter revenue, and a 10% increase over the second quarter of 2023. We had a 29% gross margin, including a write-down of our component inventory of approximately $500,000, reducing our Q2-24 gross margin by about 4%. For the six-month period, we had $22.9 million in revenue with a 32% gross margin. I want to spend a minute discussing our inventory, which you may have noticed is up $3.8 million since year end. We intentionally bulked up our inventory to ensure that we could support all of the growth we're seeing now. I want to explain the write-down and how we addressed the circumstances that created it. The write-down was related to components that became obsolete in Q2, most related to two customers. Given our past struggles with supply and the three- to six-month lead times on component supply, we decided to lean forward and order extra components in 2023 without having a guarantee that they would be used. We were focused on strengthening our supply chain by ensuring supply, which you may recall was a major issue at that time. For Q2, the customer's demand changed and product specs came into question, resulting in obsolescence without an opportunity for us to claw anything back. We acquired these components in 2023 prior to implementing many of the changes we're seeing operate so effectively during 2024, which I'll now review. To protect ourselves from production shortfalls, we've done several forward-focused things that we believe will mitigate the demand issues we were plagued with much of last year and certainly during 2022. We increased our staffing in our supply chain area. We're performing regular cycle counts of all of our inventory and we review weekly KPIs with targets for raw materials requirements at four weeks and 12 weeks out. We hover between 98% and 100% on these metrics, giving us a much more comfortable margin of safety as we approach actual production dates. We've also added a full-time dedicated scheduling professional with industry experience. This will allow our operating people to better focus on maximizing efficiencies and dealing with issues on the plant floor more immediately. Having such focus and familiarity with our inventory has resulted in a raised awareness of what our risks are and how to control them. On the other side of the equation, we've adopted a uniform approach in the way we work with our customers in terms of sharing responsibility for financing raw materials inventory and managing market risk. Between our supply chain and sales teams, we've implemented policies that we believe have achieved a good balance between having enough inventory on hand to meet demand not having to finance 100% of it in advance, and avoiding unnecessary cost exposure through the accumulation of inventory without supporting purchase orders or customer deposits, or often both. Without this $500,000 reserve, there would have been a 4% and 2% increase in Q2 24 and first half 2024 margins, respectively, bringing our gross margins up to approximately 33% and 34% for the same respective periods. This was a long way of explaining that we don't believe this type of write-down is something to expect going forward. In addition to our supply chain improvements, we also expect gross margins to improve through the combination of additional order volume, better management of smaller production runs, and the addition of new capacity as we go through 2024. We also expect second half 24 volumes to be at least 20% stronger than the first half. Operating expenses year over year were down about a million dollars. The bulk of the savings in SG&A was due to the BSF litigation costs tapering off as we settled our lawsuit with BSF in Q1. We remain focused here on operating expenses and expect to continue to control expenses. We're also seeing the benefits of our Q4 2023 restructuring as operating expenses have not grown in light of our incredible growth in 2024. The bottom line showed excellent progress with Q2 24 net income of $900,000, a $500,000 improvement over Q2 of 23, even with the $500,000 breakdown we just discussed. For the six months ended June 30th, 2024, we had $1.7 million in net income compared to an $800,000 net loss for the same period in 2023, a $2.5 million swing. In a few minutes, Kevin's going to address our operating performance. Many of our KPIs will be enhanced further through our investments in additional equipment and, at least as importantly, additional experienced technicians to keep them running smoothly. As we've had the opportunity to augment our production staff, we've benefited from bringing in more people with significant industry experience. This has created not just the benefit of having more experienced hands doing the work, but also the advancement of knowledge among our loyal, hardworking, and talented internally developed team members. We expect both our units produced and revenue generated per employee to continue to improve through these efforts. We did a bit of a deep dive into capital projects last time, so today we'll just leave it at a high level. We intend to fund any required capital through operations in 2024, with our initial projects focused on bringing our potential capacity up to about $100 million in Celestin's finished products. Total capital expenditures for this year should be in the $3 to $6 billion range, some of which may well slip into 2025. Operationally, we're focused on improving our labor per unit while also ensuring that our throughput can meet expected demand through targeted capital improvements. We have some opportunities in our current pipeline that could generate significant growth in 2025. This is in addition to the expanded demand we're expecting to continue from some of our existing Solescence customers. Now I'd like to invite Kevin Keraton, our Chief Operating Officer, to share his thoughts on our progress so far and the approach we're taking going forward. Kevin? Thanks, Jess.

As usual, I'd like to begin by thanking our teammates who every day demonstrate that we are indeed best in the industry at what we do, and our investors who continue to trust our leadership as we prove that through enhancing lives through healthy skin, we can profitably grow at more than three times the growth rate of our industry. I also would like to thank the families of our teammates for their energy and support as we take this journey together. During the Q1 conference call, we promised to not only review the operating KPIs we have discussed in the prior calls, but to also introduce and discuss our growth KPIs. So let's jump right in. First, the operating KPIs. Starting with inventory availability, which our purchasing team considers the on-time, in-full, or ODIF metric for the materials and components we buy. We have improved on our performance from last quarter as this metric is now 100% of our target performance, which is to have greater than 95% availability for materials due in 12 weeks and 98% availability for materials due in four weeks. This is both an excellent and vitally important result, as without this outstanding performance, we wouldn't be able to achieve our other two operating KPIs. Our purchasing team has also made good progress 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 possible. Their work gives us a high level of confidence in our ability to support even greater volume growth with minimal risk of supply shortages. Our second operating KPI, throughput, remained essentially unchanged from Q1 at 72% of target. However, this was done on an overall volume increase of 158% over Q1. This improvement in total units produced achieved by our manufacturing and supply chain teams, is what enabled us to achieve the record performance for Solescence. In Q3, we will need to achieve a similar 150% improvement in throughput to meet what is record levels of demand for our products, which is largely a result of substantial increases in both domestic and European sell-through for our largest brand partner, ColorScience, and over a dozen successful new launches with new brand partners such as Tatcha. Our final operating KPI, ODIS, or on-time in full, remained below target at less than 50% of our goal. As you will hear when we discuss our growth KPIs, our growth in Q2 significantly outstripped our improvements in output, which has meant that we had to make tough production decisions, such as operating at suboptimal production runs to ensure our brand partners have the product quantities they need for a successful new launch. To put even greater focus on improving ODIF, our company is implementing overall equipment effectiveness or OEE methodology to target the specific changes needed to improve our operating uptime and therefore throughput. Our work in this area only began a little more than 60 days ago. and we are already achieving small wins as we have made solid progress in increasing uptime. This improvement resulted in our company achieving the best revenue month in our history during July. Let's now spend a little time on our growth KPIs, order velocity, customer acquisition cost, and pipeline value. Order velocity measures the rate that we are generating new sales orders for our business. While we measure this weekly, it is particularly informative when we look at the year-to-date order velocity versus plan. On a year-to-date basis, our order velocity is running at 125% of plan, an excellent result. Kudos to our business development and our product development teams for their outstanding work in this area. Similarly, the BD, PD, and marketing teams are driving improvements in pipeline value which measures the total value of new business opportunities we expect to convert to revenue, and our customer acquisition costs, or CAC, which measures how much it costs us to acquire the new business. While our pipeline value is not yet meeting our very lofty goal, which is essentially to double 2024 revenue, we are at over 60% of target, still a very respectable result given the more than 40% year-over-year growth we will achieve in 2024. Further, we are doing this while lowering our customer acquisition costs by 30%. While this is a solid performance, it also suggests that it's time for us to consider even greater investment in departments that drive revenue growth. We've already started this work with programs underway to expand both the staffing and capabilities of our product development and quality teams. In closing, as I mentioned in the press release, our company, through the close collaborations we have had with our brand and supplier partners, is redefining what it means to have healthy, beautiful skin. This work is possible because of all the fabulous teams within our company. We have talked again and again about handling heart better, and they answered the call. We then asked them to raise their expectations for what great looks like, and they are achieving this, too. We have and will continue to push our teams hard, but every time, every team, from finance to quality and everyone in between, rings the bell. While our technology and know-how is second to none, it's our people that ultimately make the difference, and we and will be the reason we continue to outperform our market in terms of growth and profitability.

Back to you, Jess. Thanks, Kevin. We have more than $50 million in shipped and confirmed sales orders through this week, and we expect more to follow. As many of you know, we've not had problems generating customer demand. The markets like our Celestin's product, and they want more. Our biggest challenge has been to meet that demand. It's been a limiting factor for several years, And while we're not through yet, we have been successful in addressing that limiting factor this year, and we expect the second half to show more evidence of that in addition to more growth. While we know that most of our investors listen to the webcast or review 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. Afterward, I'll offer a few closing comments. Shannon, would you please begin the Q&A session?

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.

Our first question comes from the line of Tony Rubin, private investor.

Your line is now open.

Hi, good afternoon, gentlemen. Congratulations on a very strong sales quarter. I have a couple questions. The first is your coalescence growth has been the case for a while. It's been fantastic. Could you elaborate on the non-coalescence sales and what we might expect for those because they did drag down your overall growth? And both of you referenced very strong growth going into 2025. Do you have any sense of what 2025 top line might look like? You know, there was discussion by Jess about the inventory issue. And I'll ask, as I've asked in the past, what would your target growth margin be for this year and for next year? And lastly, I'm Always thrilled with your top-line growth and success and the market responsiveness and your awards. Always fantastic. However, you have, on a variety of occasions, not quite executed operationally. So the talk about adding staff and adding capabilities and just kind of running ahead of your perfection in operations does – you know, concern your investor base. So I'd appreciate any commentary on how, you know, you'll ensure that that is done in a measured and optimal way. Again, keeping in mind that there have been missteps. But again, overall, just congratulations on growing the company and, you know, achieving those progress. Oh, one last thing I forgot to mention is, is there any plan or thoughts about uplisting, which has been alluded to in the past, but I don't believe there's been a schedule to. So with that, I'll set up and let you guys speak. And I'm in the car, so I apologize for any noise.

That's like 12 questions, Tony. To the one question, I would say the non-solescence business is We have a little bit less insight and less control. The vast majority of that is with our partner, BSF, and we are working on expanding that product suite as well. Visibility is not fantastic there though. I think they're so far shaping up to be a good year, exceeding some expectations. I really don't have a great feel for what 2025 relative to that business will look like. And part of that, part of the reason that we created the Celescence business was because we wanted to be a lot more intimate with the customers, as close to the end users as we can be, and that's why we just have much more visibility. The rest of the nanophase non-personal care business is largely legacy business in some industrial or architectural coatings, and that's generally in the in the sub $2 million range. And those are customers that we appreciate and enjoy, but we're not doing any further development and don't really expect that to grow a lot. So that's one. Next year's volume is pretty hard to predict based on, I mean, as Kevin said, the lofty goal is that we double the volume, um, Realistically, that's tough to do, but not impossible. Generally, one of the things, your point about the production, one of the things has been being able to ramp up quickly enough to add capacity. So we're not constrained at this point with the capital constraint isn't as big a thing as you've got so many engineers and so many mechanics and technicians to help build these things in such a supply chain in terms of having to get more equipment. And that, I imagine, is going to be part of the 2025 story on whether do we get a massive amount of growth or not. I think a lot of that's going to have to be with how much is installed on the floor going into 2025 and then into the fall of 2025 leading to the 2026 launches, which is a big thing.

Yeah, maybe just to add a little bit to what Jess said there, because I think, you know, honestly, we end up, Jess and I end up thinking about a lot of these things as instead of six or seven questions is really two or three. So we may be answering multiple questions with one answer. Just going back to the growth, the is, just say it correctly, we have good visibility. Don't get us wrong. We know what the forecasts are from our partner, BASF. They've given that to us. What we don't know with the same clarity that we do with our Solescence business is the growth initiatives. And that's not to be not to be unexpected. We obviously control directly what happens with the Solescence business in a different way than we do with how the BASF business grows. However, we do expect it to be at least equal to or slightly ahead of where it was in the first half of this year as they are regaining sort of a balance between their inventory and the sell-through of the product. So I think that'll normalize a little bit in the second half. To the operating question, which is sort of a mixed question of how are we growing, and we're absolutely expecting to see continued strong growth. The trend in the industry is a lot of transitions from daytime products that didn't have SPF protection to daytime products with SPF protection, which is part of the reason why we grow at a faster rate than the industry grows. So that is something that we are expecting to continue to see is very strong growth on a year-over-year basis. But first things first for us is to finish up 2024 where we still have just a little less than half the year in front of us to do that, and that's really the biggest part of our focus, at least from that standpoint. To the operating end, though, as Jess already indicated in his prepared remarks, we are putting in for, I would say, the first time since we've established Solescence, the capital ahead of the demand. So we're not going to be hamstrung with trying to meet the demand by installing capital when we've already have the sales orders. We're actually going to have and are building out the capability to meet that demand ahead of having those sales orders. And that's in part because of the strength of the business that we're seeing right now. Our board is really keen to make sure that we're in the right position to capitalize on the growth in a more profitable manner going forward. So we are making those types of decisions. We also, as we talked about before, have really changed our operating structure with the addition now over a year of a VP of operations, the expansion of our purchasing and buying team, the addition of operations planning management. Right now, we're actually heavily recruiting for additional production management staff to really support all of the work that's being done. We've already completed a significant increase in the staffing that we need on the engineering side to have line techs that are able to improve uptime. So all of those types of things that we really lagged on doing in the past, we're in a position to do proactively and are executing on them. So we definitely are keen to make sure that we don't grow and not grow profitably. We definitely want to grow profitably. and really capture that, and that's an important part of the objectives that our board and Jess and I have for our company.

Your last question regarding the uplisting is an active discussion. We have been talking about it and will continue at the board level, and we're working through some things, understanding how many strong quarters we want under our belt before we were to attempt that, wondering how much of any dilution we would be willing to accept. And then within that, we all think that we could exercise without, I don't want to say our stock is undervalued. I would say that the things that we believe we are going to accomplish in the next year are pretty strong and will reflect really well on anything we do moving forward. So that's a consideration. And we are working through that in the effort of whether we choose to share it or not. We are working toward developing a timeline internally on that, which we may or may not choose to share. But that is something that is a very active discussion and we will probably have more to talk about as we go forward. Another thing that will help all of this is with a few more quarters of positive results, we will become a lot more bankable in a commercial sense. And at that point, we'll be able to look at the cost of capital and all these things and whether relative to dilution versus non-dilutive things and the up listing and all that, which is obviously not a direct answer to your question because there are so many different features in it. But those are things that are all coming right up on our radar right now.

Thank you.

As a reminder, to ask a question at this time, please press star 1 1 on your touch tone telephone. Our next question comes from the line of Rand K. with RKA. Your line is now open.

Good morning, gentlemen.

Nice quarter.

Impressive.

Hi, Rand.

Thank you. I want to move a little bit in the same direction that Bruce was. I think that a lot of the issues of the past, you guys have done a good job of curing. But I'm kind of curious and maybe concerned. We have $2.3 million in cash right now. And I would like to better understand what your strategy is for growth from a standpoint of... Using this capital, which was put in and we appreciate Brad's contribution, but has significantly diluted shareholder value. And how much of that growth do you intend to fund from the capital versus cash from revenues? And is there some type of formula where you guys say, you know, or area where you say, this is going to, you know, we're not going to take any, fund this from cash, from stock sales, but we're going to only take it from,

revenues generated by the company, by sales? Was I clear as mud on that?

We don't have a specific formula at this point in time. We do have a general view on it that What we don't want to do is accumulate any more debt at this point in time or use that capital that we do have and end up in a situation where we have to get another facility in any way. So, yes, the goal is to fund the growth out of operating for this year. The ultimate discussion, which will probably be probably be a year or more down the line, will be do we want to make a big leap forward on growth? And then that will be the discussion about how do we fund it, whether it's through commercial banking or through equity. And I think all of us are tied into the fact that dilution is not a good thing and that the value we have here is something precious. I mean, you learn in business school that the most expensive capital in the world is equity capital. However, when you're in a situation where you don't make money for a long time, it's the only capital that's available. And as those choices come down, I think our last choice typically would be to use equity capital. And currently, we're at a point where we're not fully borrowed and we don't need to be. And we are seeing cash getting generated, and I believe expect, forecast, and plan, to quote some safe harbor language, that the amount of cash we're going to generate is going to go up, maybe not in a perfect sequence quarter to quarter, but generally speaking, we are clearing out some of the things that haunted us in the past we are enhancing our ability to operate efficiently in the COGS level and those things I expect to lead to us generating more cash and then deciding okay you know do we do we spend it on this or spend it on that but I don't see a need the biggest need that I have heard our investors discuss relative to equity is enhanced liquidity and that to me is more important than looking for equity funding to fund anything that's in the immediate plan for 24 and 25.

I would also like to share with you one thing that has, you know, heartened me greatly, you know, recently in your calls, and that is there has always been a... kind of an urge, okay, to explore and expand markets, you know, due to a lot of, I guess, sex appeal and so on and so forth, response from customers, and that you guys are doing a much more diligent job of, you know, vetting your customers to make sure that, you know, they're real, that they have cash, making them put cash up front. And so, you know, shifting the responsibility of business development financially and putting more on the onus of the customer as opposed to, hey, let's do this just to get market share. And that shift in mentality is has been uh my greatest um i guess joy that i've heard that you know you guys have done and i just want you to know how much i appreciate that and i like what you're saying about you know funding off of revenues as opposed to equity so um thank you i appreciate it again i I look forward to, like Bruce, uplifting because, you know, the market right now is very, very small and difficult for us to execute in. So I know it has to make sense, but I would appreciate, you know, sooner than later.

Sure. Okay. Thank you, Rand. Thank you, Rand. Thanks, guys.

Thank you. Our next question comes from the line of Jim Lieberman with American Trust Investment Services. Your line is now open.

Thank you. What a great quarter, and kudos for the kind of work and the kind of execution that you've put in. And I have noticed that although the cash is just $2.3 million, your receivables are $5.9 million. Can you comment on those? Is that a 90-day term? How do you... see that playing out, the receivables.

Hi, Jim.

Hi there.

A lot of that has to do with, we do have some, we have a lot of 60-day term customers. We have a few 90, not a lot, but it's really growth-oriented. We don't have significant, we do not have significant uncollectible receivables relative to the entire balance, and I probably You know, I look at it every week when we look at our accounts receivable borrowing line. And, you know, at any given point, there might be, you know, several hundred thousand dollars that's past terms, but not uncollectible, just past 30, 60, or 90. And generally, when they're past terms, it's past 30, not the later ones. The better financed customers are the ones that are more mature customers. that have longer terms tend to pay quickly. So it hasn't been a concern. But, I mean, generally, yeah, I'd rather have AR be zero and AP be huge and have no inventory, but not the business we're in right now.

No, it looks very healthy and robust, especially with the 60-day terms. That's very comforting. And also your inventories, as you say, are pretty robust, so that should carry you through to at least get your – get you a long way through to meeting the demand that's increasing. So I feel very comfortable, especially on a historical basis, how well positioned you are right now. So congratulations. Just a couple of comments. Historically, in sort of classical economics, business growth and manufacturing, you hear about companies reaching certain sort of critical points in that $50 million area. But you already, on an annualized basis, above that, Do you see any other sort of bottlenecks at this stage of the game to get from like 50 to 75 million? Or do you feel that's organically possible?

Thanks, Jim. You know, Jess made a comment that I think it was important for everybody to hear perhaps again that, our capital plan for this year was to take us to $100 million in Solescence revenue capability. And so I think that is sort of the answer to your question is that, yeah, we're already investing ahead of where our current state is, which is, like you said, north of that $50 million run rate. to make sure that we don't have some of the same problems that we've had in the past where we were really capability was shorter than the opportunities in front of us. So I think we're in good shape from there.

And I did hear it, actually, but I had to just hear it again because it's unusual in the business world and the manufacturing space to have that kind of planning and vision to be able to – grow through that. I'm very extremely pleased. That was my draw there. The other thing is I thought I heard Jeff say something about other products for 2025. Can you give any more color to that? What that means?

Maybe customers. Yeah, customers in the pipeline. As typical, we We're still continuing to focus squarely on the beauty industry and more specifically on skincare and makeup products with SPF. And we are doing that across all categories. So whether that's a face product, a lip product, a body product, so that it gives us a pretty broad stroke for what we cover.

And other than Color Science, are there other company names that you can announce publicly? I thought I heard you mention some name, Hatcha, but I didn't know if I was misunderstanding that.

It's T-A-T-C-H-A, Hatcha. They're a Japanese-inspired beauty brand. So they are one of some of the brands that actually utilize our branding, so we can talk about it. um they or talk about them very successful brand available in sephora near you so go get that silk sunscreen and then there are some other other brands like that we've mentioned before bloom effects being another one um we've mentioned relevant before um you know there are a couple others that are um We've mentioned Kinlo before, so there are a few others that we've mentioned that we can publicly announce.

This has been a treat. Thank you very much for the presentation and for the execution. Regards. Thank you.

Thanks, Jim.

Thank you. Our next question comes from the line of Augustia Medet with Private Investor. You may begin.

Hi, yes. Congratulations on the second grade quarter. Yeah, so two quick questions for me. First, last quarter you mentioned a backlog of about $40 million or $30 million in open orders. I'm just wondering, can we get any color on that at the moment? And then second, I think Tony already asked about this, but are we still on target for 35 to 40% gross margin for the full year?

that's it yeah thank you the in terms of the you know we we disclose that we have in excess of 50 million in either shipped in July or so far in August or in hand purchase orders for the rest of 2024 and we expect In all likelihood, some more will come in. The less and less come in, the further you get toward the end of the year, obviously. But we expect that to exceed that. So from that perspective, that's what we have. We also have orders for 2025, which we're not ready to disclose that yet, but that is happening. Regarding the total margins, I think our plan is right in that range. for the end of the year, and it's going to depend. A lot of it is timing dependent. As big as we feel right this second relative to the amount we've grown, we still have some large customers that have demand that is a little bit lumpy, and while we know what the total is going to be in terms of month to month, as Kevin mentioned, July was a record month, and it really when you start talking about where the margin comes out in the end, the science isn't quite there yet, as we just haven't had enough regular high-volume business to go there. But I think that's not unreasonable for us to be into the 30s, and then long-term, potentially, there could be a four in front of there, which would be really nice.

Perfect. Thank you so much.

Thank you.

Our next question comes from the line of Ronald Richards, private investor. The line is now open.

Yeah. Well, hi, Jess. I'm encouraged to see the increased interest in your conference call this quarter. I was encouraged by something Kevin said about concentrating on increased profitability, but then my usual concern came up when Kevin mentioned that they were looking at hiring more and more staff. I guess it's my constant question in all of these calls. When will there be more emphasis on more profitability and less on increasing your staff? Or when will increases in staff result in more profitability?

Thanks, Ron. Great question. I think one of the things that we also mentioned is a real focus with the team that we have established this year. And I should say, a lot of that team was really filling in gaps that we knew were already contributing to poor performance that we had last year, as an example, where we were too heavily leaning on just a few key people that really outstrip their capacity and our capacity to execute. So the plan was and has been to add those teammates, and we have for the most part. We're not seeing anywhere near the same increase in staff levels, just to be clear, relative to our growth in terms of the top line. and in particular looking to add staff that actually improve our operating efficiency. So that's been the emphasis now we see. We sometimes are very careful in what we're saying about the impact of the staff because we're still not the biggest company in the world, and we can reveal things that would put us at a competitive or negotiating disadvantage. But I can tell you that that staff is, for example, more than paying for themselves in terms of what our purchasing team has already done. And similarly, relative to the engineering team that we've added, relative to improvements in cost with the increases in revenue at the same time. So it's a real nice mix of driving down the gross, or I should say the other way, driving up our gross profit margin by reducing costs. are direct expenses. And we still have some work to do. We have some real opportunities still for the second half of this year to further do that. And I think that really is still an important part of this plan going forward.

Okay, thank you.

Thank you. As a reminder, to ask a question at this time, please press star 1-1 on your touchtone telephone. Our next question comes from the line of Barry Blank with J.H. Darby. Your line is now open.

Hi. Good morning. I just wanted to add a comment on something that came up prior to this time on uplisting. And I don't know if you know this, but there are many – I work for a small brokerage firm, which we have permission to buy stocks that are not on NASDAQ and that are low-priced. But the majority of brokerage firms around will not allow clients to purchase stocks under $3 that are not on NASDAQ. And some won't allow them to purchase even at $3 that are not on NASDAQ. A lot of firms have that. I think that should be important. And you're taking into consideration whether you want to uplist either on NASDAQ or the American Stock Exchange Division of the New York Stock Exchange. It'll open your whole investing opportunities and markets to a whole group of people who are not able to purchase it now because of those restrictions.

Thanks, Barry. Yeah, I recognize that completely. I actually had that experience myself. I exercised a bunch of options and held them this first quarter, and they're sitting in a brokerage account that is other than my standard brokerage account for that reason. And I think we all understand that and view that as one of the advantages of the uplisting and just have to evaluate the other things that will be involved in doing so. But it's definitely a priority.

And there's one other thing. Any person wanting to borrow on their securities cannot do that. When it's uplisted, depending on the price of the stock, brokerage firms will lend on it. And that could be important to people. They would have to sell if they didn't have that advantage to be able to do that.

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Jeff Jankowski for closing remarks.

Thank you, Shannon. And thanks to all of our investors for hanging in there as we turn the corner. We're now seeing the results of executing on the strategy that we outlined several years ago. We've become the exciting company we'd all hoped for. We knew it would happen, but the when was elusive. We're just beginning at this point, and I'd We think our future is bright, so I hope everyone can finish their day with a smile when you think about coalescence and nanophase and the potential yet to be realized. Thanks for being with us today.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Thank you. you you Thank you.

Good day and thank you for standing by.

Welcome to the Nanophase Technologies Corporation second quarter 2024 earnings 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 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 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 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, Jess Genkowski, President and CEO. Please go ahead.

Thank you, Shannon. Good morning to all those listening live, and thank you to those following up later online. While we're rolling, we had a strong Q2 following a strong Q1. and we've got our foot on the gas working to make 2024 a record year for nanophase and coalescence. Kevin Curitan, our Chief Operating Officer, is joining me again on the call today. We have some prepared comments that will be available for some Q&A afterwards. Q2 of 2024 saw us with quarterly revenue of $13 million. For the first half of 2024, we had almost $23 million in revenue. To put this in perspective, $23 million in revenue for the first six months of 2024 is 33% more than our $17 million in full-year 2020 revenue, which was a major milestone at the time. We believe that second-half revenue will exceed the first half with the potential for us to achieve more than $50 million in revenue for the year. With upside, we can do better than that. Before I walk you through the numbers, I'm going to spend a minute describing our business at a high level. We've had several investors asking questions about this, and I want to be sure that we bring clarity to the story. The better we understand it, the more exciting our progress is. Nanophase and its wholly-owned subsidiary, Solescence, are almost two sides of the same coin. Nanophase is an FDA-regulated manufacturer of bulk pharmaceutical ingredients. These active ingredients serve as the backbone for everything both companies do. We started with an active ingredients business in Nanophase providing the safe and effective UVA and UVB protection found in minerals-based sunscreens through BSF. This market grew significantly in the late teens and into the early 20s. There was a limiting factor in the growth of minerals-based sunscreens, however, and that was the whitening effect of most zinc oxide additives. Our initial claim to fame was that our coated zinc oxide active ingredient, which we exclusively supplied to the market through BSF, was superior to other minerals-based ingredients. This continues to be a good market for us, as BASF continues to be a good partner in that market. In 2016 and 2017, we realized that we needed to take a new approach to capitalize on the growing demand for minerals, particularly for zinc oxide, in the market for daily wear and functional cosmetics. Dr. Harry Sarkis, along with a cast of talented scientists, was able to take our particle performance beyond the next level. We developed the Celescence technology to allow larger zinc oxide particles, referred to as non-nano in the industry, to be incorporated into various lotions without exhibiting what is referred to as ghosting in the market. We then built a formulating team with solid industry experience to help us to show cosmetics companies, which we refer to as brands, to see the benefits of Celestin's technology. By enabling very uniform and flexible particles, then a series of methods by which to disperse and formulate with them, we were able to create finished prestige cosmetic products that had the functionality of sunscreens built into everyday cosmetics. We found the holy grail in a respect. People getting ready for their day would be able to know they were getting protected against UVA, UVB, and other skin damage, which everybody wants, but by a product that otherwise seemed just like the high-end cosmetics they would typically use anyway. Coupling this massive advancement with the consumer trend against chemicals-based UV protection, along with the FDA's repeated assertions that minerals are proven safe for use, whereas chemicals-based absorbers lack such public proof, we hit this market at an excellent time. We took our FDA compliant practices, which presented a barrier to entry for many potential competitors, and with whom many were unfamiliar. Many of the FDA compliant practices, I should say, were unfamiliar to our Celestin's customers and coupled it with 25 plus years of experience making safe minerals-based active ingredients. We created a value proposition that is only just starting to show its true potential. Celestin sells through brands, not direct to consumers. This means You'll rarely see mention of Celestis in brand advertising or on packaging, but we are the enabling feature of the products our brand partners sell. That was a quick summary, I know, but we wanted to take a few minutes to ground our new investors, potential investors, in why we've been so successful and as a refresher for everyone else. Okay, now let's walk through the numbers. Unless identified otherwise, all numbers will be stated in approximate terms. We had a strong second quarter with $13 million in revenue, a 32% increase over first quarter revenue, and a 10% increase over the second quarter of 2023. We had a 29% gross margin, including a write-down of our component inventory of approximately $500,000, reducing our Q2 24 gross margin by about 4%. For the six-month period, we had $22.9 million in revenue with a 32% gross margin. I want to spend a minute discussing our inventory, which you may have noticed is up $3.8 million since year end. We intentionally bulked up our inventory to ensure that we could support all of the growth we're seeing now. I want to explain the write-down and how we address the circumstances that created it. The write-down was related to components, sink, bottles, tubes, cartons, and labels, that became obsolete in Q2, most related to two customers. Given our past struggles with supply and the three- to six-month lead times on component supply, we decided to lean forward and order extra components in 2023 without having a guarantee that they would be used. We were focused on strengthening our supply chain by ensuring supply, which you may recall was a major issue at that time. For Q2, the customer's demand changed and product specs came into question, resulting in obsolescence without an opportunity for us to claw anything back. We acquired these components in 2023 prior to implementing many of the changes we're seeing operate so effectively during 2024, which I'll now review. To protect ourselves from production shortfalls, we've done several forward-focused things that we believe will mitigate the demand issues we were plagued with much of last year and certainly during 2022. We increased our staffing in our supply chain area. We're performing regular cycle counts of all of our inventory and we review weekly KPIs with targets for raw materials requirements at four weeks and 12 weeks out. We hover between 98 and 100 percent on these metrics, giving us a much more comfortable margin of safety as we approach actual production dates. We've also added a full-time, dedicated scheduling professional with industry experience. This will allow our operating people to better focus on maximizing efficiencies and dealing with issues on the plant floor more immediately. Having such focus and familiarity with our inventory has resulted in a raised awareness of what our risks are and how to control them. On the other side of the equation, we've adopted a uniform approach in the way we work with our customers in terms of sharing responsibility for financing raw materials inventory and managing market risk. Between our supply chain and sales teams, we've implemented policies that we believe have achieved a good balance between having enough inventory on hand to meet demand not having to finance 100% of it in advance, and avoiding unnecessary cost exposure through the accumulation of inventory without supporting purchase orders or customer deposits, or often both. Without this $500,000 reserve, there would have been a 4% and 2% increase in Q2 24 and first half 2024 margins, respectively, bringing our gross margins up to approximately 33% and 34% for the same respective periods. This was a long way of explaining that we don't believe this type of write-down is something to expect going forward. In addition to our supply chain improvements, we also expect gross margins to improve through the combination of additional order volume, better management of smaller production runs, and the addition of new capacity as we go through 2024. We also expect second half 24 volumes to be at least 20% stronger than the first half. Operating expenses year over year were down about a million dollars. The bulk of the savings in SG&A was due to the BSF litigation costs tapering off as we settled our lawsuit with BSF in Q1. We remain focused here on operating expenses and expect to continue to control expenses. We're also seeing the benefits of our Q4 2023 restructuring as operating expenses have not grown in light of our incredible growth in 2024. The bottom line showed excellent progress with Q2 24 net income of $900,000, a $500,000 improvement over Q2 of 23, even with the $500,000 breakdown we just discussed. For the six months ended June 30th, 2024, we had $1.7 million in net income compared to an $800,000 net loss for the same period in 2023, a $2.5 million swing. In a few minutes, Kevin's going to address our operating performance. Many of our KPIs will be enhanced further through our investments in additional equipment and, at least as importantly, additional experienced technicians to keep them running smoothly. As we've had the opportunity to augment our production staff, we've benefited from bringing in more people with significant industry experience. This has created not just the benefit of having more experienced hands doing the work, but also the advancement of knowledge among our loyal, hardworking, and talented internally developed team members. We expect both our units produced and revenue generated per employee to continue to improve through these efforts. We did a bit of a deep dive into capital projects last time, so today we'll just leave it at a high level. We intend to fund any required capital through operations in 2024, with our initial projects focused on bringing our potential capacity up to about $100 million in Celestin's finished products. Total capital expenditures for this year should be in the $3 to $6 billion range, some of which may well slip into 2025. Operationally, we're focused on improving our labor per unit while also ensuring that our throughput can meet expected demand through targeted capital improvements. We have some opportunities in our current pipeline that could generate significant growth in 2025. This is in addition to the expanded demand we're expecting to continue from some of our existing Solescence customers. Now I'd like to invite Kevin Keratin, our Chief Operating Officer, to share his thoughts on our progress so far and the approach we're taking going forward. Kevin? Thanks, Jess.

As usual, I'd like to begin by thanking our teammates who every day demonstrate that we are indeed best in the industry at what we do, and our investors who continue to trust our leadership as we prove that through enhancing lives through healthy skin, we can profitably grow at more than three times the growth rate of our industry. I also would like to thank the families of our teammates for their energy and support as we take this journey together. During the Q1 conference call, we promised to not only review the operating KPIs we have discussed in the prior calls, but to also introduce and discuss our growth KPIs. So let's jump right in. First, the operating KPIs. Starting with inventory availability, which our purchasing team considers the on-time, in-full, or ODIF metric for the materials and components we buy. We have improved on our performance from last quarter as this metric is now 100% of our target performance, which is to have greater than 95% availability for materials due in 12 weeks and 98% availability for materials due in four weeks. This is both an excellent and vitally important result, as without this outstanding performance, we wouldn't be able to achieve our other two operating KPIs. Our purchasing team has also made good progress 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 possible. Their work gives us a high level of confidence in our ability to support even greater volume growth with minimal risk of supply shortages. Our second operating KPI, throughput, remained essentially unchanged from Q1 at 72% of target. However, this was done on an overall volume increase of 158% over Q1. This improvement in total units produced achieved by our manufacturing and supply chain teams, is what enabled us to achieve the record performance for Solescence. In Q3, we will need to achieve a similar 150% improvement in throughput to meet what is record levels of demand for our products, which is largely a result of substantial increases in both domestic and European sell-through for our largest brand partner, ColorScience, and over a dozen successful new launches with new brand partners such as Tatcha. Our final operating KPI, ODIS, or on-time in full, remained below target at less than 50% of our goal. As you will hear when we discuss our growth KPIs, our growth in Q2 significantly outstripped our improvements in output, which has meant that we had to make tough production decisions, such as operating at suboptimal production runs to ensure our brand partners have the product quantities they need for a successful new launch. To put even greater focus on improving ODIF, our company is implementing overall equipment effectiveness, or OEE methodologies, to target the specific changes needed to improve our operating uptime and therefore throughput. Our work in this area only began a little more than 60 days ago. and we are already achieving small wins as we have made solid progress in increasing uptime. This improvement resulted in our company achieving the best revenue month in our history during July. Let's now spend a little time on our growth KPIs, order velocity, customer acquisition costs, and pipeline value. Order velocity measures the rate that we are generating new sales orders for our business. While we measure this weekly, it is particularly informative when we look at the year-to-date order velocity versus plan. On a year-to-date basis, our order velocity is running at 125% of plan, an excellent result. Kudos to our business development and our product development teams for their outstanding work in this area. Similarly, the BD, PD, and marketing teams are driving improvements in pipeline value which measures the total value of new business opportunities we expect to convert to revenue, and our customer acquisition costs, or CAC, which measures how much it costs us to acquire the new business. While our pipeline value is not yet meeting our very lofty goal, which is essentially to double 2024 revenue, we are at over 60% of target, still a very respectable result given the more than 40% year-over-year growth we will achieve in 2024. Further, we are doing this while lowering our customer acquisition costs by 30%. While this is a solid performance, it also suggests that it's time for us to consider even greater investment in departments that drive revenue growth. We've already started this work with programs underway to expand both the staffing and capabilities of our product development and quality teams. In closing, as I mentioned in the press release, our company, through the close collaborations we have had with our brand and supplier partners, is redefining what it means to have healthy, beautiful skin. This work is possible because of all the fabulous teams within our company. We have talked again and again about handling heart better, and they answered the call. We then asked them to raise their expectations for what great looks like, and they are achieving this, too. We have and will continue to push our teams hard, but every time, every team, from finance to quality and everyone in between, rings the bell. While our technology and know-how is second to none, it's our people that ultimately make the difference, and we and will be the reason we continue to outperform our market in terms of growth and profitability.

Back to you, Jess. Thanks, Kevin. We have more than $50 million in shipped and confirmed sales orders through this week, and we expect more to follow. As many of you know, we've not had problems generating customer demand. The markets like our Celestin's product, and they want more. Our biggest challenge has been to meet that demand. It's been a limiting factor for several years, And while we're not through yet, we have been successful in addressing that limiting factor this year, and we expect the second half to show more evidence of that in addition to more growth. While we know that most of our investors listen to the webcast or review 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. Afterward, I'll offer a few closing comments. Shannon, would you please begin the Q&A session?

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.

Our first question comes from the line of Tony Rubin, private investor.

Your line is now open.

Hi, good afternoon, gentlemen. Congratulations on a very strong sales quarter. I have a couple questions. The first is your coalescence growth has been the case for a while. It's been fantastic. Could you elaborate on the non-coalescence sales and what we might expect for those because they did drag down your overall growth? And both of you referenced very strong growth going into 2025. Do you have any sense of what 2025 top line might look like? You know, there was discussion by Jeff about the inventory issue, and I'll ask, as I've asked in the past, what would your target growth margin be for this year and for next year? And lastly, I'm Always thrilled with your top-line growth and success and the market responsiveness and your awards. Always fantastic. However, you have, on a variety of occasions, not quite executed operationally. So the talk about adding staff and adding capabilities and just kind of running ahead of your perfection in operations does, you know, concern your investor base. So I'd appreciate any commentary on how, you know, you'll ensure that that is done in a measured and optimal way. Again, keeping in mind that there have been missteps. But again, overall, just congratulations on growing the company and, you know, achieving those progress. Oh, one last thing I forgot to mention is, is there any plan or thoughts about uplisting, which has been alluded to in the past, but I don't believe there's been a schedule to. So with that, I'll set up and let you guys speak. And I'm in the car, so I apologize for any noise.

That's like 12 questions, Tony.

To the one question, I would say the non-solescence business is We have a little bit less insight and less control. The vast majority of that is with our partner, BSF, and we are working on expanding that product suite as well. Visibility is not fantastic there though. I think they're so far shaping up to be a good year, exceeding some expectations. I really don't have a great feel for what 2025 relative to that business will look like. And part of that, part of the reason that we created the Celescence business was because we wanted to be a lot more intimate with the customers, as close to the end users as we can be, and that's why we just have much more visibility. The rest of the nanophase non-personal care business is largely legacy business in some industrial or architectural coatings, and that's generally in the in the sub $2 million range. And those are customers that we appreciate and enjoy, but we're not doing any further development and don't really expect that to grow a lot. So that's one. Next year's volume is pretty hard to predict based on, I mean, as Kevin said, the lofty goal is that we double the volume, um, Realistically, that's tough to do, but not impossible. Generally, one of the things, your point about the production, one of the things has been being able to ramp up quickly enough to add capacity. So we're not constrained at this point with the capital constraint isn't as big a thing as you've got so many engineers and so many mechanics and technicians to help build these things in such a supply chain in terms of having to get more equipment. And that, I imagine, is going to be part of the 2025 story on whether do we get a massive amount of growth or not. I think a lot of that's going to have to be with how much is installed on the floor going into 2025 and then into the fall of 2025 leading to the 2026 launches, which is a big thing.

Yeah, maybe just to add a little bit to what Jess said there, because I think, you know, honestly, we end up, Jess and I end up thinking about a lot of these things as instead of six or seven questions is really two or three. So we may be answering multiple questions with one answer. Just going back to the growth, the is, just to say it correctly, we have good visibility. Don't get us wrong. We know what the forecasts are from our partner, BASF. They've given that to us. What we don't know with the same clarity that we do with our Solescence business is the growth initiatives. And that's not to be not to be unexpected. We obviously control directly what happens with the Solescence business in a different way than we do with how the BASF business grows. However, we do expect it to be at least equal to or slightly ahead of where it was in the first half of this year as they are regaining sort of a balance between their inventory and the sell-through of the product. So I think that'll normalize a little bit in the second half. To the operating question, which is sort of a mixed question of how are we growing, and we're absolutely expecting to see continued strong growth. The trend in the industry is a lot of transitions from daytime products that didn't have SPF protection to daytime products with SPF protection, which is part of the reason why we grow at a faster rate than the industry grows. So that is something that we are expecting to continue to see is very strong growth on a year-over-year basis. But first things first for us is to finish up 2024 where we still have just a little less than half the year in front of us to do that, and that's really the biggest part of our focus, at least from that standpoint. To the operating end, though, as Jess already indicated in his prepared remarks, we are putting in for, I would say, the first time since we've established Solescence, the capital ahead of the demand. So we're not going to be hamstrung with trying to meet the demand by installing capital when we've already have the sales orders. We're actually going to have and are building out the capability to meet that demand ahead of having those sales orders. And that's in part because of the strength of the business that we're seeing right now. Our board is really keen to make sure that we're in the right position to capitalize on the growth in a more profitable manner going forward. So we are making those types of decisions. We also, as we talked about before, have really changed our operating structure with the addition now over a year of a VP of operations, the expansion of our purchasing and buying team, the addition of operations planning management. Right now, we're actually heavily recruiting for additional production management staff to really support all of the work that's being done. We've already completed a significant increase in the staffing that we need on the engineering side to have line techs that are able to improve uptime. So all of those types of things that we really lagged on doing in the past, we're in a position to do proactively and are executing on them. So we definitely are keen to make sure that we don't grow and not grow profitably. We definitely want to grow profitably. and really capture that, and that's an important part of the objectives that our board and Jess and I have for our company.

Your last question regarding the uplisting is an active discussion. We have been talking about it and will continue at the board level, and we're working through some things, understanding how many strong quarters we want under our belt before we were to attempt that, wondering how much of any dilution we would be willing to accept. And then within that, we all think that we could exercise without, I don't want to say our stock is undervalued. I would say that the things that we believe we are going to accomplish in the next year are pretty strong and will reflect really well on anything we do moving forward. So that's a consideration, and we are working through that in the effort of whether we choose to share it or not. We are working toward developing a timeline internally on that, which we may or may not choose to share. But that is something that is a very active discussion and we will probably have more to talk about as we go forward. Another thing that will help all of this is with a few more quarters of positive results, we will become a lot more bankable in a commercial sense. And at that point, we'll be able to look at the cost of capital and all these things and whether relative to dilution versus non-dilutive things and the uplisting and all that, which is obviously not a direct answer to your question because there are so many different features in it, but those are things that are all coming right up on our radar right now.

Thank you.

As a reminder, to ask a question at this time, please press star 1-1 on your touchtone telephone. Our next question comes from the line of Rand K. with RKA. Your line is now open.

Good morning, gentlemen.

Nice quarter.

Impressive. Hi, Rand. Thank you. I want to move a little bit in the same direction that Bruce was. I think that a lot of the issues of the past, you guys have done a good job of curing. But I'm kind of curious and maybe concerned. We have $2.3 million in cash right now. And I would like to better understand what your strategy is for growth from a standpoint of Using this capital, which was put in and we appreciate Brad's contribution, but has significantly diluted shareholder value. And how much of that growth do you intend to fund from the capital versus cash from revenues? And is there some type of formula where you guys say, you know, or area where you say, this is going to, you know, we're not going to take any, fund this from cash, from stock sales, but we're going to only take it from,

revenues generated by the company, by sales.

Was I clear as mud on that? We don't have a specific formula at this point in time. We do have a general view on it that What we don't want to do is accumulate any more debt at this point in time or use that capital that we do have and end up in a situation where we have to get another facility in any way. So, yes, the goal is to fund the growth out of operating for this year. The ultimate discussion, which will probably be probably be a year or more down the line will be, do we want to make a big leap forward on growth? And then that will be the discussion about how do we fund it, whether it's through commercial banking or through equity. And I think all of us are tied into the fact that dilution is not a good thing and that the value we have here is something precious. I mean, you learn in business school that the most expensive capital in the world is equity capital. However, when you're in a situation where you don't make money for a long time, it's the only capital that's available. And as those choices come down, I think our last choice typically would be to use equity capital. And currently, we're at a point where we're not fully borrowed and we don't need to be. and we are seeing cash getting generated, and I believe expect, forecast, and plan, to quote some safe harbor language, that the amount of cash we're going to generate is going to go up, maybe not in a perfect sequence quarter to quarter, but generally speaking, we are clearing out some of the things that, haunted us in the past we are enhancing our ability to operate efficiently in the COGS level and those things I expect to lead to us generating more cash and then deciding okay you know do we do we spend it on this or spend it on that but I don't see a need the biggest need that I have heard our investors discuss relative to equity is enhanced liquidity and that to me is one more important than looking for equity funding to fund anything that's in the immediate plan for 24 and 25.

I would also like to share with you one thing that has, you know, heartened me greatly, you know, recently in your calls, and that is there has always been a kind of an urge, okay, to explore and expand markets, you know, due to a lot of, I guess, sex appeal and so on and so forth, response from customers, and that you guys are doing a much more diligent job of, you know, vetting your customers to make sure that, you know, they're real, that they have cash, making them put cash up front. And so shifting the responsibility of business development financially and putting more on the onus of the customer as opposed to, hey, let's do this just to get market share. And that shift in mentality is, has been uh my greatest um i guess joy that i've heard that you know you guys have done and i just want you to know how much i appreciate that and i like what you're saying about you know funding off of revenues as opposed to equity so um thank you i appreciate it again i I look forward to, like Bruce, uplifting because, you know, the market right now is very, very small and difficult for us to execute in. So I know it has to make sense, but I would appreciate, you know, sooner than later.

Sure. Okay. Thank you, Rand. Thank you, Rand. Thanks, guys.

Thank you. Our next question comes from the line of Jim Lieberman with American Trust Investment Services. Your line is now open.

Thank you. What a great quarter, and kudos for the kind of work and the kind of execution that you've put in. And I have noticed that although the cash is just $2.3 million, your receivables are $5.9 million. Can you comment on those? Are those like 90-day terms? see that playing out, the receivables.

Hi, Jim.

Hi there.

A lot of that has to do with, we do have some, we have a lot of 60-day term customers. We have a few 90, not a lot, but it's really growth-oriented. We don't have significant, we do not have significant uncollectible receivables relative to the entire balance, and I probably You know, I look at it every week when we look at our accounts receivable borrowing line. And, you know, at any given point, there might be, you know, several hundred thousand dollars that's past terms, but not uncollectible, just past 30, 60, or 90. And generally, when they're past terms, it's past 30, not the later ones. The better financed customers are the ones that are more mature customers. that have longer terms tend to pay quickly. So it hasn't been a concern. But I mean, generally, yeah, I'd rather have AR be zero and AP be huge and have no inventory, but not the business we're in right now.

No, it looks very healthy and robust, especially with the 60-day terms. That's very comforting. And also your inventories, as you say, are pretty robust. So that should carry you through to at least get your get you a long way through to meeting the demand that's increasing. So I feel very comfortable, especially on a historical basis, how well positioned you are right now. So congratulations. Just a couple of comments. Historically, in sort of classical economics, business growth and manufacturing, you hear about companies reaching certain sort of critical points in that $50 million area. But you already, on an annualized basis, above that, Do you see any other sort of bottlenecks at this stage of the game to get from like 50 to 75 million? Or do you feel that's organically possible?

Thanks, Jim. You know, Jess made a comment that I think it was important for everybody to hear, perhaps again, that our capital plan for this year was to take us to $100 million in Solescence revenue capability. And so I think that is sort of the answer to your question is that, yeah, we're already investing ahead of where our current state is, which is, like you said, north of that $50 million run rate. to make sure that we don't have some of the same problems that we've had in the past where we were really capability was shorter than the opportunities in front of us. So I think we're in good shape from there.

And I did hear it, actually, but I had to just hear it again because it's unusual in the business world and the manufacturing space to have that kind of planning and vision to be able to – grow through that. I'm very extremely pleased. That was my draw there. The other thing is I thought I heard Jeff say something about other products for 2025. Can you give any more color to that? What that means?

Maybe customers. Yeah, customers in the pipeline. As typical, we We're still continuing to focus squarely on the beauty industry and more specifically on skincare and makeup products with SPF. And we are doing that across all categories. So whether that's a face product, a lip product, a body product, you know, so that it gives us a pretty broad stroke for what we cover.

And other than Color Science, are there other company names that you can announce publicly? I thought I heard you mention some name, Hatcha, but I didn't know if I was misunderstanding that.

It's T-A-T-C-H-A, Hatcha. They're a Japanese-inspired beauty brand. So they are one of some of the brands that actually utilize our branding, so we can talk about it. um they or talk about them very successful brand available in sephora near you so go get that silk sunscreen and then there are some other other brands like that we've mentioned before bloom effects being another one um we've mentioned relevant before um you know there are a couple others that are um We've mentioned Kinlo before, so there are a few others that we've mentioned that we can publicly announce.

This has been a treat. Thank you very much for the presentation and for the execution. Regards.

Thank you. Thanks, Jim.

Thank you. Our next question comes from the line of Augustia Medet with Private Investor. You may begin.

Hi, yes. Congratulations on the second great quarter. Yeah, so two quick questions for me. First, last quarter you mentioned a backlog of about $40 million or $30 million in open orders. I'm just wondering, can we get any color on that at the moment? And then second, I think Tony already asked about this, but are we still on target for a 35% to 40% gross margin for the full year? That's it. Yeah, thank you.

In terms of the, you know, we disclosed that we have in excess of $50 million in either shipped in July or so far in August or in-hand purchase orders for the rest of 2024, and we expect In all likelihood, some more will come in. The less and less come in, the further you get toward the end of the year, obviously. But we expect that to exceed that. So from that perspective, that's what we have. We also have orders for 2025, which we're not ready to disclose that yet, but that is happening. Regarding the total margins, I think our plan is right in that range. for the end of the year, and it's going to depend. A lot of it is timing dependent. As big as we feel right this second relative to the amount we've grown, we still have some large customers that have demand that is a little bit lumpy, and while we know what the total is going to be in terms of month to month, as Kevin mentioned, July was a record month, and it really when you start talking about where the margin comes out in the end, the science isn't quite there yet, as we just haven't had enough regular high-volume business to go there. But I think that's not unreasonable for us to be into the 30s, and then long-term, potentially, there could be a four in front of there, which would be really nice.

Perfect. Thank you so much.

Thank you.

Our next question comes from the line of Ronald Richards, private investor. You want to start open?

Yeah. Well, hi, Jess. I'm encouraged to see the increased interest in your conference call this quarter. I was encouraged by something Kevin said about concentrating on increased profitability, but then my usual concern came up when Kevin mentioned that they were looking at hiring more and more staff. I guess it's my constant question in all of these calls. When will there be more emphasis on more profitability and less on increasing your staff? Or when will increases in staff result in more profitability?

Thanks, Ron. Great question. I think one of the things that we also mentioned is a real focus with the team that we have established this year. And I should say a lot of that team was really filling in gaps that we knew were already contributing to poor performance that we had last year, as an example, where we were too heavily leaning on just a few key people that really outstrip their capacity and our capacity to execute. So the plan was and has been to add those teammates, and we have for the most part. We're not seeing anywhere near the same increase in staff levels, just to be clear, relative to our growth in terms of the top line. and in particular looking to add staff that actually improve our operating efficiency. So that's been the emphasis now we see. We sometimes are very careful in what we're saying about the impact of the staff because we're still not the biggest company in the world, and we can reveal things that would put us at a competitive or negotiating disadvantage. But I can tell you that that staff is, for example, more than paying for themselves in terms of what our purchasing team has already done. and similarly relative to the engineering team that we've added relative to improvements in cost with the increases in revenue at the same time. So it's a real nice mix of driving down the gross, or I should say the other way, driving up our gross profit margin by reducing are direct expenses. And we still have some work to do. We have some real opportunities still for the second half of this year to further do that. And I think that really is still an important part of this plan going forward.

Okay, thank you.

Thank you. As a reminder, to ask a question at this time, please press star 1-1 on your touchtone telephone. Our next question comes from the line of Barry Blank with J.H. Darby. Your line is now open.

Hi. Good morning. I just wanted to add a comment on something that came up prior to this time on uplisting. And I don't know if you know this, but there are many – I work for a small brokerage firm, which we have permission to buy stocks that are not on NASDAQ and at a low price. But the majority of brokerage firms around will not allow clients to purchase stocks under $3 that are not on NASDAQ. And some won't allow them to purchase even at $3 that are not on NASDAQ. A lot of firms have that. I think that should be important. And you're taking into consideration whether you want to uplist either on NASDAQ or the American Stock Exchange Division of the New York Stock Exchange. It'll open your whole investing opportunities and markets to a whole group of people who are not able to purchase it now because of those restrictions.

Thanks, Barry. Yeah, I recognize that completely. I actually had that experience myself. I exercised a bunch of options and held them this first quarter, and they're sitting in a brokerage account that is other than my standard brokerage account for that reason. And I think we all understand that and view that as one of the advantages of the uplisting and just have to evaluate the other things that will be involved in doing so. But it's definitely a priority.

And there's one other thing. Any person wanting to borrow on their securities cannot do that. When it's uplisted, depending on the price of the stock, brokerage firms will lend on it, and that could be important to people. They would have to sell if they didn't have that advantage to be able to do that.

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Jeff Jankowski for closing remarks.

Thank you, Shannon. And thanks to all of our investors for hanging in there as we turn the corner. We're now seeing the results of executing on the strategy that we outlined several years ago. We've become the exciting company we'd all hoped for. We knew it would happen, but the when was elusive. We're just beginning at this point, and I We think our future is bright, so I hope everyone can finish their day with a smile when you think about coalescence and nanophase and the potential yet to be realized. Thanks for being with us today.

This concludes today's conference call. Thank you for your participation. You may now disconnect.