FIRST QUARTER 2022 CONFERENCE CALL

Jess Jankowski, President & CEO 

Thank you, Justin. 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 first quarter 2022 investor call. Today’s discussion will cover current results, the current state of the business, some of our plans for 2022, and a forward look. Kevin Cureton, our Chief Operating Officer, is also with me here today.

We’ve received some feedback that our Q4 results were disappointing, as I’m sure our Q1 results could be interpreted to be. We want to address this directly today, as it’s more a matter of interpretation, in our view, than a statement of direction.

I’ll spend more time on this after the numbers, but the context in which I’d like all of you to place our results are bounded by certain assumptions that we, as your management, are considering in executing on our strategy:

• We’re seeing high demand for our technically enabled products by Consumers & Brand Partners, undergirded by a favorable regulatory landscape,

• The seeds of our growth were planted during 2018 and 2019, with little additional marketing and customer development done through 2021,

• We’re at that rare time in the life of a disruptive technology where building more business is limited mainly by our ability to produce more product.

These are the reasons why we also believe that we need to accelerate our marketing and development at the same time we address our operational issues. We believe that the greatest way to enhance the enterprise value of Nanophase, and Solésence, isn’t simply by improving earnings, but also by expanding our footprint, in a series of prestige cosmetics brands that will allow us to build a formidable and higher-profile presence, and, in doing so, create a greater barrier to entry for our competitors. This is how we plan to maximize the return to all of our shareholders and stakeholders.

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

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

After a challenging January and February, we finished with a record March to bring Q12022 revenue to $8.2M, up by $1.1M, even when compared to the record revenue of $7.1 for the same period last year. It’s worth noting that we had some internal issues that kept us from shipping another $2+ million in products during this past quarter. March 2022 revenue was a record $3.8 million, and we expect this to be closer to where we can operate going forward. More on that later.

Net income was about $60K, or $0.00/share, for the first quarter of 2022, compared to $360K, or $0.01/share, for the same quarter in 2021, before including the $950K in other income generated from the forgiveness of our PPP loan in February of 2021. That was a one-time event in 2021 that didn’t relate to operations.

Our Q122 gross margin was at $2.2 million, or 27% of sales, reflecting an increase in total dollars, but a percentage decrease of 2% when compared to the prior year’s 1st quarter margins.  We had no medical diagnostics material sales in Q12022, compared to $900K in Q12021. We estimate that reversing this change in revenue mix would have caused Q122 gross margin percentage to be slightly higher than that of the prior years.

We built significant inventory in Q1 of ’22, increasing the total on our balance sheet by $2.5 million since 12/31/21. This was mainly due to our continued strategy of building raw materials inventory to buffer current supply chain limitations, while some of it was due to Work-in-process inventory that was not converted in time to ship in March. 

As you can tell, we are being impacted by the growth we’ve experienced, along with the things we discussed during our last call, chief of which were inventory issues, compounded by COVID-related absences during January. These things amount to “growing pains,” which have definitely impacted our Q421 and Q122 results, but are transitory. While not pleasant, this will result in greater strength, ability, and capacity for our Company.

The margins were depressed, but this is due to the investments we are making to maximize the value of this business. As we mentioned in the press release, we shipped better than $3 million in April, and we have purchase orders in hand for another $24 million in revenue for 2022. We also have purchase orders in hand for more than $6 million in revenue for 2023. It’s highly likely that we will receive more purchase orders for 2022 during the balance of this year. It is also likely that a substantial portion of our 2023 purchase orders would be happily accepted by our customers in 2022 if we are able to deliver.

These things point to why our throughput and expanding capacity to support coming growth are so critical to us.

Now, I want to add more context to the way we are viewing the Nanophase and Solésence businesses. We believe it’s important that you know what’s motivating our decisions, and how we are evaluating our progress.

To that point, I’d like to re-visit the assumptions we’re operating under in greater depth: 

• First, our Solésence and API markets are at a point where the consumer base has become aware of the inherent health benefits, to our minerals-based ingredients and products. Industry is supporting their views, and government regulators are “putting the cherry on top,” by going after chemicals-based competitors regarding the lack of robust safety data. Minerals-based UV absorbers are what the markets want, and they are where we bring things to the table that others can’t.

• Second, for those of you that are newer to our Company, the growth seeds for Solésence were planted during 2018 and 2019. We have done little marketing, or new customer development, over the past several years. This means that our customer base, and the excellent growth within it that we are experiencing, have been built upon the merits of our products, word-of-mouth, and the work we did, prior to 2020, in getting our products in front of industry leaders.

• Third, we’re at that rare time in the life of a disruptive technology where building more business is limited mainly by the time, we can invest in it.

This is why we believe we have to accelerate our marketing and development at the same time as we address our operational issues. Given the type of markets we’re in, particularly for Solésence products, we need to aggressively develop new business to ensure that our leadership position will be sustainable as more competition comes in to play.

Finally, we’re being limited by the constraints put on our organization by the fantastic growth we’ve seen in our Solésence products. The fixes to this are more of “blocking and tackling” in nature, than rocket science. (The “rocket science” is done.)  The production and operational improvements we need to make will get done by applying known solutions as we onboard the internal capacity to support them.

This begs a question I like to ask our team frequently, sometimes to an annoying extent, I’m sure: what could this Company look like if we could really step on the gas?

If I were to put it all in a single sentiment: we believe that the greatest way to enhance the enterprise value of Nanophase, and Solésence, isn’t simply by improving earnings, but by expanding our footprint in a series of prestige cosmetics brands that will allow us to build, a formidable, and higher-profile presence, to maximize the return to all of our shareholders and stakeholders.

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.