Nanophase Technologies Corporation (PNK:NANX) Q3 2023 Earnings Call Transcript

Nanophase Technologies Corporation (PNK:NANX) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Good day and thank you for standing by. Welcome to Nanophase Third Quarter 2023 Financial Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. The words believe, expects, anticipates, plans, forecasts and similar expressions are intended to identify forward-looking statements. Statements contained in the 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, Mr. Jess Jankowski, President and Chief Executive Officer.

Please go ahead, sir.

A businesswoman in the modern cityscape of an IT metropolis, symbolizing the company’s pioneering spirit in the world of information technology.

Jess Jankowski: Thank you, Norma. Good morning to all of those listening live. Welcome to those who choose to listen later online. Thanks for joining us today for our discussion of our third quarter 2023 results, the state of the business and our outlook for the rest of the year going into what we plan to be a watershed 2024. Kevin Cureton, our Chief Operating Officer, is joining me on the call today. I have some brief prepared comments and then Kevin and I will have some time for some Q&A afterwards. While our results are not yet reflecting yet, we are in the process of implementing several things that we expect to return positive financial results in the near-term. We have added to our operations team, first, with the VP of Manufacturing that we added in Q2.

Now with an experienced senior purchasing manager this month who in addition to having relevant and broad industry experience has also built a purchasing organization from the ground up in a company with similar growth to what we have seen over the past few years with our Solésence business. That perspective and experience is something we have been missing that we expect to profit from almost immediately. We mentioned in the release that Q3 was impacted heavily by supply chain issues, most related to purchasing and production planning where we couldn’t get everything aligned efficiently enough to deliver on our volume commitments. Barring existential events, we don’t expect to have to deal with these types of things in 2024. Given that much of our funding has been through the financing of working capital, low shipping volume leads directly to cash crunches.

That leads to inefficiencies, operational compromises and temporary losses of negotiating leverage. These things have been a struggle this year beginning in Q2. Another way we have addressed these issues is through the renegotiation of our existing loan facilities and the addition of a modest amount of equity capital to give us some flexibility. We are also in the process of securing some additional financing for capital equipment as needed. We have received or will receive an additional $3.2 million in cash over the next several working days, $1.2 million of this will be through an expansion of our revolving credit line secured by inventory. We now have excellent terms on both our inventory and accounts receivable revolving lines for the support of our largest shareholder.

The terms we have, which you can see in detail in our 10-Q, are significantly better than we believe we can get elsewhere. This has been a nice benefit to us and helps us to focus more on the metrics we need to meet or exceed to help us to achieve our ultimate goal of increasing our enterprise value. The remaining $10 million in financing will come from a shareholder rights offering that we are in the process of implementing, with an S-1 to be filed soon. At a high level, we will offer 5 million shares of stock to our existing shareholders only at a price of $0.40 per share. Each shareholder will have the right to purchase this Nanophase stock based on their ownership percentage. The pro rata calculation amounts roughly to the right to purchase one share of stock for every 10 shares currently owned.

We built in an overallotment feature that will allow the purchase of an additional 60% of the pro rata amount of shares if desired. The principle here is that we want all of our shareholders to have the opportunity to avoid dilution while supporting our forward growth strategy. Recognizing that our stock is thinly traded, this will represent an opportunity to maintain or enhance your position in a single transaction at a fixed price. Our largest investor has agreed to serve as a backstop to ensure that the entire 5 million shares are purchased. So if the other shareholders do not express interest in purchasing their allotments, Mr. Whitmore will purchase the remaining balance. He has also agreed to extend the company a $2 million bridge loan against the proceeds to allow us immediate access to this capital.

This was funded yesterday. The critical goal here is to head into 2024 primed to deliver more value through increased gross margins, reduced operating costs and a more sustainable infrastructure. We are definitely driving Solésence growth, but enabled by the equity financing, we are planning to do it with a greater degree of security as we navigate the inevitable cyclicality of our business. This is all the more important because we don’t expect our Solésence business growth to slow for the foreseeable future. We are positioning ourselves for a strong 2024 with our primary focus to be enhancing profitability and efficiency. The growth will continue and we have shown we can accelerate it further when the time is right. The last step toward building our value is profitability.

Before we continue, let’s walk through the numbers. Unless identified otherwise, all numbers will be stated in approximate terms. Our Q3 2023 revenue was $8 million versus $9.7 million for the same period last year. For the third quarter of 2023, we had a net loss of $1.4 million or $0.03 per share versus a net loss of $0.8 million or $0.02 per share for the same period in 2022. Looking at the nine-month comparable numbers, we had $29.3 million in revenue in the nine months ended September 30, 2023 versus $29.1 million in the same period in 2022. For the same nine months of 2023, we had a net loss of $2.3 million versus a net loss of $0.6 million for the same period in 2022. Much of this poor performance in 2023 relates to our extended struggles with getting product out the door, often due to external supply chain issues and internal bottlenecks.

As I mentioned last time, most of our external supply chain issues have been resolved. With the addition of our new Purchasing Manager and the VP of Manufacturing, who was just promoted to VP of Operations in October and is just hitting his stride, we think we will get the last of the internal issues resolved this quarter. An added benefit our enhanced purchasing function will provide will be the reduction of our direct material costs through more aggressive negotiation and attention to discounted pricing programs available through many suppliers. The added capitalization will help here, too. While gross margins are disappointing, a big contributor to that for Q3 has been that we couldn’t get enough good shift due to planning and logistics, not lack of demand, so we weren’t able to absorb overhead.

We have seen some very strong labor utilization and throughput numbers with our new equipment over the past few months and expect that to contribute to enhanced margins as we get the organization running more efficiently. Moving down to P&L. Third quarter R&D and SG&A expenses combined were down $400,000 or 12%. We are currently spending a great deal of time internally to optimize our bang for the buck here and expect to report on further progress at year end. Looking at the nine-month expenses. If we back out the BASF litigation expense, SG&A would have been down 9% year-over-year. While we are continuing to incur expenses relative to litigation with BASF, legal expenses were down to less than $150,000 for this past quarter. We spent roughly $1.2 million here during the nine months ended September 30th, with almost 90% of it distributed almost equally in the first two quarters.

Also spent approximately $400,000 in 2022 in this litigation. We continue negotiating with BASF in good faith, with an ideal outcome being a negotiated settlement. Litigation is still a possibility and we continue to think we have a good case of things go in that direction, but the goal remains to resolve these issues with BASF as quickly and fairly as is practical. We also saw nine-month interest expense almost triple, a $375,000 increase from the same period in 2022 due to the combination of expanded borrowing and a 5%-plus increase in the prime lending rate over the past year and a half. While this call has been focused on operations, we wanted to offer a few updates on the commercial side. These are the reasons that we all remain optimistic about 2024 and beyond.

In the release, we said we left September with about $19 million in open and shipped orders in the books. Since Friday, we have 3-plus million more orders for 2024 booked, bringing confirmed POs in total for 2024 to over $13 million. Total remaining orders for 2023 are about $5-plus million in addition to $4 million being shipped so far. Total customers exceed 60, with approximately eight of those companies purchasing greater than $1 million in products from us and another half dozen purchasing greater than $500,000 in products from us. This leads to a more robust pipeline from which we expect further growth in addition to new or growing customers coming in for 2024. While we are not thrilled with 2023 bottomline performance, we continue to get excellent customer feedback.

This is where we build a one, two punch. We fought most of this year to get ourselves a better footing for profitable growth in 2024. Along with growth, we have been focused on increasing our margins, but entering 2024, increasing our margins will be our primary focus. It’s all about building value in the near-term, which we know will lead to even more value over the next few years after that. We are all investors in Nanophase and Solésence and we all stand to reap the rewards we are working toward together. Why don’t we get right to your questions? Although, we know that most of our investors listen to the webcast or review the transcript after the live call, I’d like to invite those participating in today’s call to ask any questions you may have or to share your feedback.

Afterward, I will offer a few closing comments. Norma, would you please begin the Q&A session?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Barry Blank with J.H. Darbie. Your line is open.

Barry Blank: Thank you very much. Jess, I have several questions. The first question is, this company has absolutely no shareholder relations. I have visited the company about five years ago, you and I met. My clients own seven figures, well into the millions of shares of stock. I have called numerous times, nobody returns to the phone call and that’s why the stock is probably lower than it would be if it normally had some kind of shareholders’ relations. Are we going to do anything in the future to improve the shareholders’ relations and get the story out a little bit to shareholders?

Jess Jankowski: Hi, Barry. We are — part of it is our — we are just stretched thin and recognizing that everybody does better when they know more, we see the value in it, but we also see that we are struggling relative to trying to contain operating expenses and other things in order to ultimately come back in at a higher level of profitability, which will drive the value. We have been not investing as much in IR partly, because the results have not merited. The — I mean, we — to a certain extent, we don’t want to beat the drum and then not have great results to support them. And that’s one of the reasons we haven’t done investor talks and gone on traveling and doing kind of non-deal road shows and those kinds of things to much of an extent. I envision over time doing this more so, and once we get stabilized and we get to the point where we are talking about uplisting, I imagine that will be even more of something we would invest in.

Barry Blank: Well, I am not advocating you hire an IR firm. Now I think it’s kind of premature. But the silence when someone calls and not getting a call back, it’s kind of disturbing. I mean I did visit the company. I flew down from Phoenix to visit you five years or six years ago, you and I met. And every now and then, a client has a question. Nobody wants inside information or anything like that, but we can’t get a call back. And I just don’t think, I mean, I know you are busy, don’t get me wrong and you could put it as a none — on the back burner. But at least acknowledge the fact when people make contact to get back to them. That’s what I am asking.

Jess Jankowski: That’s fair, Barry. One of the issues is that most of the IR is done by me directly and that always chews up time. And we also invariably, some of our investors, particularly the ones that have been around a while like yourself and your clients, will call during what is effectively a quiet period between the time we end the quarter and before we release earnings. And that just — without having the time to devote to a more polished IR program and I am not suggesting we would use a firm regardless. But to have more ready communications, I think, tough to answer some of those questions, because they are very — many are very specific and that would involve information that hasn’t been shared and that just takes time.

But I do respect you as a shareholder and I respect your point of view and I recognize that we need to get back to people better and those things are easier to do via email just because of the nature of the — it’s a more efficient process. But that is something that we will take into consideration for sure.

Barry Blank: One other question. What is the timeframe, I know you can’t predict that you are being effective with the SEC, but what is the timeframe on this rights offering you expect to have it?

Jess Jankowski: Yeah. Our goal is to get it filed, get the S-1 filed within a week and then, typically, there is no guarantee. We did one in 2012, which took the SEC a little over three weeks to approve. This time, we are going into the holiday season, but I would guess it would be in the range of 30 days. So probably sometime towards later December, with the bulk of the activity being in January then.

Barry Blank: Thank you very much. Appreciate it.

Jess Jankowski: Thank you.

Operator: Thank you. One moment for our next question please. Next question comes from the line of Ronald Richards [ph], a private investor. Your line is now open.

Unidentified Analyst: Hi, Jess.

Jess Jankowski: Hi, Ron.

Unidentified Analyst: I have got a few questions. The first one is a long time ago, several years, there was a big press release about an Australian regulatory approval that you guys received and I keep expecting some big announcement of some big combination with an Australian company because of that approval, but to my knowledge, I have never seen anything. Has anything become of that?

Jess Jankowski: I am going to let Kevin answer that one, Ron.