Nanophase Technologies Corporation

Investor Relations +

FOURTH QUARTER 2021 CONFERENCE CALL

Jess Jankowski, President & CEO

Thank you, Latonia. Good morning to all of those listening live, and welcome to those who choose to listen later online. We’re glad you could join us for our fourth quarter and full year 2021 investor call. Today’s discussion will cover current results, the current state of the business, and some of our plans for 2022. Kevin Cureton, our Chief Operating Officer, will be joining me on the call today.

It really was a great year!

We are now a company that can sell everything we can make, and more, which, while frustrating to a degree, puts us in a much different place than we have ever been. Our strategy remains on the mark. The markets we serve are demanding our products, and we have enhanced our liquidity and begun expanding our facilities to support a critical expansion.

As I mentioned last time, we have been able to accomplish that most critical achievement for any growth company, particularly one like ours, that is driven by new and disruptive technology. We have guided our Companies, Nanophase and Solésence, to the point where business development and sales growth are not our biggest challenges anymore.

We continue to be asked by our customers to ship more than we can make, which is an excellent problem to have!

Last quarter, we told you that our greatest current challenges were enhancing and expanding capacity, managing working capital, and adding top people to our team. We also told you that these were all addressable challenges, and typical ones that all fast-growing companies are faced with.

Since that time, we have executed on several of our goals to make Nanophase and Solésence more capable, larger, and ultimately more profitable.

- In December, we leased a 260,000 square foot building that will allow us to consolidate a series of operations that have been limiting our throughput and efficiency,

- In January, we closed on new financing to support our growing working capital demands, providing $6M more in available capital, and

- Between December ’21 and today, we have filled two newly-created leadership roles on our commercial team, as well as adding more than two dozen new team members across our manufacturing and supply chain functions.

We have a lot of work to do in 2022. Some of it will be rugged, but in the end with a degree of patience and good management, there are known ways to address the issues that we believe are holding us back. We’re in a better spot than we have ever been in before. Now, we have to execute.

We remain optimistic about the future of our Solésence finished products business, and about the growing demand for minerals-based products and ingredients generally. If anything, over the past few years, trends toward broader consumer acceptance and desire for minerals-based skin health products have accelerated.

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

Unless identified otherwise, all numbers will be stated in approximate terms.

Our Q42021 revenue was $7.4M, up by $2.5M, or more than 50%, when compared to the record revenue of $4.9M for the same period last year. Full-year 2021 revenue was up 72%, at $29.5M, compared with then-record revenue of $17.1M for the same previous year. For the fourth quarter of 2021, we had a net loss of $395K, or $0.01/share. This was down $590K, or $0.02 per share, compared to Q42020. For the full year 2021, Earnings were $2.3M, coming in at $0.05/share. This represents an increase of $1.3M in earnings, or $0.02/share over full-year 2020 numbers.

We generated $2.3M in cash from operations in 2021, versus using $2.1M in cash for operating activities in 2020, better than a $4M improvement year over year. In 2020, we added $900K in capital equipment, followed by $1.9M in additional equipment in 2021. These things are going to allow us to increase our throughput, and then our profitability.

In fact, earnings, cash flows from operations, and our new financing brought us to the point where our auditors agreed with our assessment that there was no longer a Going Concern risk for your Company. Lifting this has been a critical achievement, in that the Going Concern had been an impediment to financing, as well as weakening our negotiating position in various circumstances.

To tie up the discussion of the financials, I wanted to disclose that during our annual audit, we determined that we had a material weakness in our internal controls relating to our inventory for the year. During this process, we were forced to spend an inordinate amount of time on completing a full physical inventory for 2021. Our inefficiencies here cost us in time, money, and opportunities to ship more product. This issue was closely related to the jump in 2021 sales volume. We stepped up to a new level of volume and complexity in our business, and the limitations within our existing controls and business systems were exposed. We were all very frustrated by this, mainly from the impact it had on our operations in the period of December through February.

Undoubtedly, our sales and production were reduced during this period over what we expected. External factors compounded our issues and slowed production further.

This was due to several things:

- First, actually grinding through the physical inventory and the related documentation took time, then,

- Lags in our supply chain, kept raw materials from arriving on time, and lastly,

- December & January absences related to illness, probably due to the Omicron variant, took many key people out of critical roles in a situation where backups were hard to find. This spate of absences was more damaging than those related to Covid-19 had been in 2020 and the first three quarters of 2022.

February was a better month, and March had us operating at a more normal level.

Now, let’s shift gears to talk about our growth drivers:

Solésence products are still number one in driving current and expected future growth here. We had $18.2M in Solésence sales for 2021, compared to $6.7M last year, and $1.9M for 2019. A “triple…triple.” In a couple of minutes, Kevin will discuss specifics on our Solésence growth, and forward strategy. There’s a lot more to come.

In our Personal Care Ingredients sales, which we often refer to as Active Pharmaceutical Ingredients, or “APIs,” we saw some nice growth in 2021, and we expect growth to continue in 2022. We had $7.7M in API sales for the year, compared to $5.5M for the same period in 2020, an increase of 40%. APIs remain an important part of our business, and we believe that the API business will grow by 30%, or more, in 2022. This should put volumes back in the $10M annual range, with some upside.

Medical Diagnostics, and related life science applications, represent our third and final strategic area of focus. These sales compose the majority of those reported in our Advanced Materials product category. This category also includes all of our legacy products for architectural coatings, surface treatment and polishing. We had $3.6M in Advanced Materials sales in 2021, compared to $4.9M for the same period in 2020. The majority of sales in this category represent Medical Diagnostics. During 2020 and in to the first half of 2021, the COVID-19 Pandemic greatly accelerated our sales in this space, however, we saw a drop-off in Medical Diagnostics for the 2nd half of 2021. While we don’t expect 2022 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, sometimes a fraction of that. While volume was down a bit in 2021, we are committed to this market, as is our major customer in it. 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 remains our view that the expanded testing environment we’ve been living under, 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. This is why we have elevated development in this area to become our third major strategic focus.

To recap, our 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.

We still have some legacy products in a few industrial applications, but we are not doing any further product or market development in this area.

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

Kevin Cureton, Chief Operating Officer

Thanks Jess. To begin, I would like to thank all our investors for your continued support of our company. Your presence here reflects positively on the progress we have made and the mission our company is on - to enhance people's lives through healthy skin. Today, I would like to provide a bit more depth in terms of our business performance - specifically the Solésence business to help put a bit more context around the results. I'm sure you all can appreciate our challenge which is to provide you, our investors, a deeper understanding on your company while trying to protect information that our competitors would like to learn, and our clients and brand partners don't want to reveal. We think we have a path forward to do this, by providing general descriptions of our performance and improvements to our ability to generate profit through increases in staffing, assets, and geographic scope. We did provide a bit more of these details in the recent press release than we have in the past so I will follow this same approach in this discussion. Let's begin with the revenue side of the business and some basic facts about our company. While we are not willing to state the specific number of clients, we have between 3 and 4 dozen brand partners that have either received shipments, placed orders, or both during 2022. This is approximately a 40% increase over 2021. I stated in the press release that we had retained over 90% of our clients. To put this in perspective, we only had two clients that did not return from 2021, and their combined purchases were less than $250,000, or 2% of revenue.

We are fortunate to note that we have doubled the number of clients that purchase more than $1 mm in products from us compared with just 4 in 2020, and 2 in 2019. We do continue to work with a wide range of early-stage clients as one or several of these may be the Estée Lauder or L'Oreal of the future and a couple of our early-stage brand partners that launched in 2021 have already exceeded $500,000 in orders and shipments in 2022. We also have launched more than 250 products with our brand partners, which includes products with the leading clean beauty brand in Sephora, the leading derm positioning skin care brand, and 3 different billion-dollar global skin care brands. When this is all pulled together, this results in having in hand orders that already equals 2021 results. Further, when these orders are combined with the forecasts from our largest clients, we expect solid full year growth, with Solésence revenue in 2022 approaching the 2021 results of our entire company.

When we started our company’s transformation at the beginning of 2020, we knew we that given the limited capitalization and organizational capacity, that we had to be laser focused on one or two priorities to enable our success. Those two areas were consumer focused product and technological superiority and the foundational operating capabilities to meet demand while addressing the requirements of the FDA. This focus helped us establish our business and our growing leadership position as the partner of choice for brands – also helping to launch the new generation of beauty products - products that not only feel and look great but are also designed to enhance the health of your skin by addressing the leading cause of premature aging – UV damage. While far from complete, our successful revenue growth indicates that we are well on our way toward creating the dynamic growth vehicle we envisioned.

We have now entered a new phase of our growth plan. During this next phase, our focus will include pursuing operational excellence while we drive growth. The changes we make will largely be driven by three key areas – people, processes, and production assets to increasing our organizations breadth and depth. As Jess mentioned earlier, we have begun the steps toward our goal of being a customer focused, world class manufacturing organization. For example, we have added over thirty people to our team in just the last 90 days - and we are executing aggressively on expanding manufacturing capability in terms of scale and speed in all areas from our zinc oxide production all the way through to our finishing goods packaging capability. While we will be prepared to further elaborate on these investments and changes during our next conference call - Please note that the benefit of these changes won't show up overnight - we have a lot of changes to digest as stay aggressive on acquiring new customers - but will instead be accrued with steady improvements in gross margins and operating profits over the second half of 2022 and into 2023. In closing, while we recognize we face many challenges to come, we also remain confident in our ability to further execute our growth based upon the evidence of the past year - even with the rather limited capabilities we had in place in 2021 we were able to grow our income by more than twice the rate we grew our revenue - profit grew by 3X over 2020 when top line grew slightly over 70%. As our tag line says – The Future of Sun care IS the Future of Beauty – and therefore the future of your company still shines as brightly as the sun.

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. Again, we’re about enhancing people’s lives through healthy skin with our Solésence beauty science products, and our active pharmaceutical ingredients. We think medical diagnostics is also an excellent fit for the Companies we are, and where we want to take them. These are the areas where we see the greatest demand, and the areas where we believe we offer the greatest value. It also 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.

We have developed some amazing, and marketable, technologies, and have demonstrated the rare ability to successfully commercialize them. That was the hard part.

There will be much more work coming in 2022 and 2023, but again, we know what to do. We are winning in areas that we can now control, and we are working to improve the functioning of our Companies in areas with known solutions.

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.

Latonia, would you please begin the Q&A session?

10:23 AM

Q&A SESSION PLACEHOLDER

11:03 AM

Thank you, Latonia. We’ve come to a point where we are a much different Company today than we were even a year ago, certainly a few years ago.

We’ve added people and facilities to support growing sales, and we’re not done growing yet!

- Our shipped and open purchase orders leaving Q4 exceeded $33M.

- Solésence is growing quickly, and we are effectively selling everything we can make.

- We’re seeing growth in APIs, with the potential for 2022 sales to exceed $10M.

- Growth in both of these businesses is supported by a directional change in the markets we serve, favoring the minerals-based products that are the foundation of everything we do.

- Our Medical Diagnostics ingredients business remains an area of strategic importance to us.

- And we are focusing on bringing new people, new equipment, and additional facilities online to accommodate more growth in Solésence.

We are in an excellent position to keep growing. In 2022, we plan to “clear the decks” to make this more seamless. We’ll start with building more operational efficiencies of scale this year, then ramp up our focus on enhancing profitability. We like where we’re at!

We’re looking forward to the opportunity to discuss the business with you again next month. Thank you again for taking the time to listen, and to support our exciting companies.

Have a great day everybody!