Nanophase Technologies Corporation

Investor Relations +

THIRD QUARTER 2021 CONFERENCE CALL

Jess Jankowski, President & CEO

Thank you, Michelle. Good morning to all of those listening live, and welcome to those who choose to listen later online.

I’m glad you could join us for our third quarter 2021 investor call. Today’s discussion will cover current results, the current state of the business, and our plans for 2022. Kevin Cureton, our Chief Operating Officer, will be joining me on the call today.

It’s hard not to be excited about our progress in 2021. Our strategy, our investment of time, focus, and financial resources have helped us to finally achieve our longstanding goal of becoming an exciting company. We have brought our Companies to the point where business development and sales growth are not our biggest challenges anymore. The markets want what we have developed, and we continue to see demand grow, through 2022 and beyond.

I invite you to contemplate something. The greatest challenges we are facing today involve enhancing and expanding capacity, managing working capital, and adding top people to our team. These are addressable challenges that fall in with those that all fast-growing businesses deal with. There are known ways to solve these things, and they involve a degree of patience, proper management of financial resources, and applying known solutions. What a great spot to be in. Over the past two years, there hasn’t been any appreciable slowing of the trends we’d been seeing, toward broader consumer acceptance of, and demand for, minerals-based skin health products. We remain optimistic about the future of our Solésence finished products business, and about the growing demand for minerals-based products and ingredients generally.

Before I expand on this, let’s cover some numbers:

Unless identified otherwise, all numbers will be stated in approximate terms. Our Q32021 revenue was $7.9M, up 104%, or $4M, when compared to the record revenue of $3.9M for the same period last year. Nine-month 2021 revenue was up 80%, topping $22M, compared with then-record revenue of $12M for the same period in 2020. For the third quarter of 2021, earnings were $1.4M, or $0.03/share. This was up $900,000, or $0.02 per share, quarter over quarter. For the nine-months in 2021, Earnings were $2.7M, coming in at $0.06/share. This represents an increase of $1.9M, or $0.04/share over nine-month 2020 numbers. 2020 may not have been that long ago, but we’re a different company today. We now have a multiple. Solésence products are still the driving force behind our growth. We had $13.4M in Solésence sales for the 1st nine months of 2021, compared to $6.7M for all of 2020, and $1.9M for 2019.

I’ll leave it to Kevin to discuss specifics on what’s been driving our Solésence growth, and how we plan to expand it, by continuing to develop new products and new customers a bit later in the call.

Our Personal Care Ingredients sales, which we often refer to as Active Pharmaceutical Ingredients, or “APIs,” have seen nice growth so far in 2021, and we expect growth to continue in 2022. We had $5.3M in API sales for the 1st nine months of 2021, compared to $4.2M for the same period in 2020. APIs are still an important part of our business. We expect solid Q4 volume, then we think we will get back to the $8 - $9M annual range in 2022.

Before we discuss Medical Diagnostics and Life Sciences, the third strategic part of our business, I wanted to take a few minutes to explain the macro environment driving the growth, both in our Solésence business, and now, of our API or ingredients business.

While the two areas are very different in terms of our customer base and our growth expectations, many of the same forces are fundamental to our value in both markets. Nanophase and Solésence are companies that have pioneered the use of zinc oxide, as not only safe, but also aesthetically pleasing, alternatives to chemicals-based products. The markets we serve have seen minerals-based sun- and skin health products, driven largely by zinc oxide as the critical API, continue to see good demand growth. Minerals have dominated growth in both active- and daily-wear sunscreens. In leisure wear and cosmetics. They have also proven to be a bright spot for the prestige cosmetics markets. Consumers want comfortable and safer ways to look great, and to protect their skin from environmental damage, much of which comes from the Sun’s rays.

Regarding our plan for Solésence, we saw record growth in sales throughout the COVID-19 Pandemic. We like where we have positioned ourselves, and feel great about our strategy.

In addition to the high quality of our products, and their good performance in protecting and enhancing skin health, the series of external things happening in the marketplace continue to help us expand our product advantages. You may recall that over the past several years now, some of the most common chemical sunscreens have been banned, due to their environmental impacts. They are not considered safe for use near coral reefs. Many of our downstream API customers, and all of our Solésence customers, have seen that consumers everywhere, landlocked or seaside, have drawn their own conclusions. They don’t like the thought of endangering themselves, or the environment.

Additionally, the Food and Drug Administration’s pronouncements on sunscreen API safety, the 1st proposals to review these ingredients in decades, continue to pressure the industry to either prove the safety of chemical sunscreens, or eventually withdraw them from the market. There were 16 active ingredients listed on what the FDA calls the “Monograph,” or the list of active ingredients allowed to be used in human sun care in the United States. Of the fourteen chemicals-based APIs on this list, the FDA has declared two of these ingredients unsafe for humans, and the other twelve to require much more data to be submitted to prove them safe for use on humans. Combined, those fourteen active ingredients represent all of the APIs currently allowed in the monograph in the class that we refer to as being “chemicals-based.” They also represent our most significant market competition, and they make up fourteen out of the sixteen total ingredients included in the monograph. Zinc oxide and titanium dioxide, the two remaining options in the current monograph, are the only two that the FDA has deemed to be safe for human use. Both are the only “minerals-based” APIs. That’s what we make, that’s what people want, and that’s what we sell.

While the industry is pushing back, the FDA has gone to atypical lengths to hold the chemicals-based manufacturers accountable. They need to prove that their products are safe or pull them from the market. This will continue to unfold over the next few years, and we expect this to continue to be a positive for us in the marketplace. Regardless of the near-term FDA outcome, consumers have been listening to all of this, and reacting to it. Many have decided they aren’t going to wait on the FDA, so they’re demanding more minerals-based products on their own. We are in a great spot to take advantage of what we think will be a growing, then possibly permanent shift, in these markets.

Moving on to our third and final strategic area of focus. Medical Diagnostics and related life science applications comprise this part of our business. These sales reside in our Advanced Materials product category. This category also includes all of our legacy products for architectural coatings, surface treatment and polishing. We had $3.4M in Advanced Materials sales for the 1st nine months of 2021, compared to $3.7M for the same period in 2020. The great majority of sales in this category represent Medical Diagnostics. The COVID-19 Pandemic greatly accelerated our sales in this space during 2020, and for the first half 2021. We saw a drop-off in Medical Diagnostics Ingredients sales for Q3 of this year, and do not expect any significant Q4 sales of these products.

While we don’t expect near-term demand to reach the same levels as we’ve seen over the last couple of years, we do expect demand in this area to continue to exceed historic levels, which, prior to 2020, were generally in the sub-$1million-range annually.

We also believe that the type of testing our major medical diagnostics customer does, called Polymerase Chain Reaction, or commonly, “PCR” testing, has become a critical use of our technology in the life science space. It is our view that the current expanded testing environment, regardless of the specific virus to be targeted, signals a trend toward greater acceptance of the practice of testing as a normal part of our lives. While it is difficult to predict to what extent COVID-specific demand will impact growth in this area going forward, we have demonstrated some important things with our ingredients here. We believe that our deep expertise in materials science has created advantages that enable performance in certain tests that may not be achievable through other materials. This is why we have elevated development in this area to become our third major strategic focus.

To recap, these three strategic areas are, in order of expected near-to-mid-term growth:

- Solésence fully formulated products;

- Active Pharmaceutical Ingredients for sun and skin care; and,

- Medical Diagnostics Ingredients

While we still sell some legacy products in the architectural coatings and polishing space, these volumes are relatively low, and we are not doing any further product or market development in this area. Again, we’re about skin-health products and ingredients, and medical diagnostics. These are the areas where we see the greatest demand, and the areas where we believe we offer the greatest value.

Now I’d like to introduce Kevin Cureton, our Chief Operating Officer, to discuss progress in these strategic areas, and its drivers, in more detail.

Kevin Cureton, Chief Operating Officer

Thanks Jess. As Jess has already noted, it’s been a long time since we have had an opportunity to speak with you all – and we are pleased to be able to bring such good news to our investor community.

Before I begin my brief remarks – to hopefully allow sufficient time for what we are sure will be lots of questions – I would like to highlight the tireless work of our teams here at Nanophase. The work of the people employed by our company has been nothing short of remarkable – given the dramatic turn around our company has achieved during the greatest health crisis the world has experience in over 100 years. We invested heavily in policies and procedures to ensure their health and safety and in return our team delivered best in class technologies that help underpin the clean beauty movement, large volumes of materials that helped to diagnose COVID-19, and as a result of these efforts record revenue growth and profitability. We thank this talented group of people and continue to be excited about what we collectively will create in the future.

Jess already indicated that the primary driver of our growth has been our transformation as a leading provider of skin health products. Skin health, by the way, includes both our Active Ingredients and Solésence businesses. While much of what I will comment on today is focused on our Solésence business strategy, some of the same market forces that help drive Solésence also are helping to grow the Active Ingredients business. I would also like to point out that what we have become in the last two years was enabled in no small part by the prior twenty years as a cGMP bulk drug manufacturer, thus leveraging the investments we have made in building our company in the past.

Now on to the Solésence strategy. The strategy we formulated over 4 years ago is crystallized in our company’s vision which is to enhance people’s lives through healthy skin. We knew there were a few challenges in translating our vision into products and ultimately profit – so we further refined our vision into 3 core tenants to how we would approach this business

1. The first of our core tenants is to build sustainable differentiation. For us this means creating patentable technologies that address skin health issues in a manner that enables the creation of finished products with highly desired consumer benefits and features. The foundation of our growth is a combination of mineral and plant-based technologies that enable us to formulate best in class skin care and color cosmetics with high SPF protection. Our technology benefits go beyond SPF to also offer proven protection against other environmental aggressors that compromise skin health – such as pollution and blue light.

2. The second tenant was for Nanophase to be the company building these products instead of supplying materials. This allowed us to shorten the time to market and be able to grab a much larger share of the value chain. We also knew that by building the products ourselves, we would have direct and intimate contact with the companies that are making the decision about what actually reaches the consumer – the brands. This would also allow us to have much greater control of our business destiny. Because of the strength of our technology, our talented formulators are able to emphasize the creation of aesthetically beautiful products – products that are a pleasure to wear again and again - while enabling our brand partners to have novel, patent protected claims. As a result, our brand partners are able to achieve leading positions in the beauty market and are growing at well above the rate of the beauty market as a whole.

3. And finally, our third tenant was to create a path for our clients – or as we prefer to call them brand partners – to be able to rapidly bring these novel, beautiful products to market. It is often stated that bringing OTC products like we make to market is expensive and time consuming – it’s hard. Well, we determined that we had the ability to make what is hard easy – and therefore invested early on in creating a line of white label products that serve as the foundation for rapid prototyping and development of new products and formulas – enabling some of our clients to get to market in less than 6 months – which is about 1/3 of the time it typically takes to launch a new skin care or color cosmetics product containing SPF.

These 3 tenants – technology-based differentiation, product supply rather than materials supply, and enabling the rapid launch of best-in-class beauty products – have served as the guideposts for how we allocate our resources and where we invest. Again, our talented and capable team has been the underpinning for this strategy and the wonderful results we have seen and will see in the future. They embraced collaborative work to solve problems that in the past were bigger than our company – with the idea that “We all do better, when we all do better” a quote from the late Senator Paul Wellstone – as the call to action.

In closing, as I mentioned in the press release our ability to lead isn’t just about clean beauty, it’s also about the ability to bring these wonderful clean beauty solutions to a diverse audience – people of all age groups, all identities, all skin types, and all skin tones. We, with our brand partners, are proud that we have successful brought and will continue to bring the best skin health solutions to anyone and everyone who wants to enjoy these great products and enhance their lives through healthy skin.

Now I’d like to hand things back over to Jess for some closing comments before we begin today’s Q&A session. Jess?

Jess Jankowski, President & CEO

Thanks Kevin. It bears repeating that your Company, our Company, has reached the point where we are working on expanding capacity, and tightening-up our operations and logistics. These are the things that, while certainly not easy, are neither a mystery, nor are they in areas where we lack experience, or where such experience is unavailable outside of Nanophase and Solésence. Sure, we’re in a tough employment market, but we’re not looking for a unicorn to make Nanophase and Solésence take off. We have developed some amazing, and marketable, technologies, and have demonstrated the rare ability to successfully commercialize it. That was the hard part. There will be much more work involved, but, again, we know what to do. As we’ve said in the past, we are winning in areas that we can control.

Although we know that most of our investors listen to the webcast, or review the transcript, after the live call, we’d like to invite those participating in today’s call to ask any questions you may have, or to share your comments.

Michelle, Would you please begin the Q&A session?

Q&A SESSION PLACEHOLDER

Thank you, Michelle. These are challenging times for us at Nanophase and Solésence, but they are the best kind of challenges. We left Q3 with almost $30M in purchase orders in-hand. We are on a much steadier and sustainable footing with Solésence and we’re seeing growth in APIs. Both supported by a directional change in the markets we serve, favoring minerals-based products, and we have proven successful in helping to identify and combat some of the greatest acute health challenges that most of us have ever seen. So, hang on, it’s only going to get better.

We’re looking forward to the opportunity to discuss the business again with you after year-end, and thanks again to all of you for taking the time to listen, and to support our exciting companies.

Have a great day everybody.