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?

See also 21 Best Places for Canadians to Retire Abroad and 20 Countries With The Largest Natural Gas Reserves in 2023.

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.

Kevin Cureton: Good morning, Ron. We — and this dates back to during the pandemic, we were able to get a TGA approval, which is specific to a customer and a product. That TGA approval did end up with the launch of a product in that market. What is continuing to happen in Australia, which has been a bit frustrating is that, you have to go back and reapply and we did go back and reapply, and we are still waiting for their regulatory process to be completed. There still backed up pretty substantially and we haven’t heard anything related to continuation of that second round of regulatory approvals. So I will say in — to that comment about Australia, though, that we do see it as a pretty fertile ground. There’s a large number of or a meaningful number, I won’t say large, isn’t the right term, but a meaningful number of clients that are interested in supplying them in that space.

And we do still — we operate in that space now through a non-regulatory process, which kind of gets into the weeds. But there are still a number of good clients available to us for the regulated side of that.

Unidentified Analyst: So is this second regulatory process more general and further encompassing than the first one?

Kevin Cureton: No. The process that Australia has, it’s not very different than the Canadian process as well. It is company and product specific. So even if a company, we will call them company A, gets an approval on product B, if they want to launch product C, they have to go back through that process again. So it is a pretty tedious and arduous process. It does usually go faster. Canada, for example, goes very fast now for us. But Australia still has some backup in their processes, which is kind of related to the unique circumstances they had related to COVID and the kind of shutdowns that they had, which is backing up not just us, but pretty much anyone who’s looking for drug clearance is there.

Unidentified Analyst: Okay. Now my next question relates to the new facility. When that was promoted, I don’t know, two years or three years ago now, it was going to be your path to increase profitability because all of your different functions would be centered in one location. But to my knowledge, you still have all of your remaining other facilities. Are you soon going to be able to meet your original goals for that new facility and get some benefit from combining everything?

Jess Jankowski: Hey, Ron. We are already getting benefits from the combination. We have all of our warehousing is in that facility and prior to acquiring that facility we actually had four facilities for a little while with multiple warehouses. So we have gotten a benefit there. Our filling and assembly is there, including we have got clean rooms built there that accommodate the FDA requirements. So we have seen some nice efficiencies there, having the crews in a single space and being able to see some growth there. What we haven’t done yet is combined multiple facilities and the — some of this is going to be a question of volume, some of it will be a question of specific product volume and then we also have the concept that the cost of the combination needs to be advantageous relative to the cost of the existing rents, which are fairly small at the other facilities.

So we are in process of working through that. We intend to continue down that path and I imagine next year or two, we will have some consolidation. But we are still kind of looking at that and we are still kind of looking at the various — the impact of the various volume changes to the business and how those relate.

Unidentified Analyst: Okay. I just have two more questions. The next one is it seems like every conference call, every quarterly report, we are going to get further advantages from new hires, new managers, new people with a lot of experience here and there. But it’s always the same story, it doesn’t seem like we — it doesn’t seem like help, like, it helps because it’s always another instance, the same story, new people. And I am wondering how much cost that’s added to the bottomline, I mean is that the difference between profitability if you zero out their profits and/or their salaries and assuming you still make as much money, would you — would we be making a profit?

Jess Jankowski: I think that — I don’t know about that, I mean the biggest single drain on profitability has been the litigation and that’s something that we see hopefully coming to an end relatively soon. Again, I can’t predict it. We have — some of it, I think, the expectations are higher than we had our VP of Operations start in late June. He’s done a good job in four months getting up to speed, but he’s just now starting to contribute. We have also had our purchasing person started in November and we actually have not had a discrete purchasing function per se for a long time. Certainly since Solésence came along, we have been kind of working it. The formulators kind of do some of their own thing as we go through a bunch of different suppliers as we get up to speed.

So I am expecting those two particular additions to have a greater impact on our bottomline than we have seen in the past. Regarding the other things, we have added, we — you don’t see the advantage of, we added a controller. That’s allowed us to certainly spend more time doing some analytical work and responding to changes in our business. I do think and we will talk more about it at the end of the year, we are continuing to look at the operating expenses and a lot of those costs that are variable and trying to work through the most efficient way possible to both keep our cost down or reduce our cost, but also to continue growing. And I think that for 2024, what you are going to see to a greater extent is an increase in profitability and an increase in margins that will be something that we put more emphasis on than we have in the past.

It’s always been an emphasis, but it will be the primary emphasis with growth. As you can see, looking at the customer stats, we have a good amount of, I won’t call it organic growth within the customer base, because we continue to develop new products for our existing customers, but we have a good amount of positive customer feedback and we are seeing that those products are taking hold generally in the marketplace. So I don’t think it’s never — saying it never helps. I think it’s going to help. I think it takes longer. It always takes longer to get people up to speed, familiar with the organization and our organization is still relatively new and we are transitioning from a strictly entrepreneurial organization than we were, say, three years ago to a much more regiment organization, particularly in the operations function, which is something that culturally has required some changes that we are working hard towards.

Unidentified Analyst: Okay. And then my last question, Jess, is that lawsuit. When is it scheduled for a trial and do you have a trial date, a firm trial date? Do you have proposed settlement agreements floating around out there? When are we going to get that paying off around from our neck?

Jess Jankowski: Sure. There is not a trial date set. There’s a date at which set — which discovery has to be completed, which is the end of the year. We have been working toward, we speak regularly, just about weekly, with the BASF commercial team who was generally the people working on this — working on the settlement with us. So I have confidence that we are going to get somewhere with it. I’d love to see it behind us in the next several months, but you never know. They have — everybody has internal people to answer to, and we are — I think we are working through it in a positive way and I do think that all the indications are that they in earnest want to get through this and settle this without much further pain.

Unidentified Analyst: Okay. Well, I appreciate your answers, Jess, and of course, I wish you luck, Jess.

Jess Jankowski: Sure. Thank you, Ron.

Operator: Thank you. One moment for our next question. Our next question comes from the line of James Lieberman with Revere Securities. Your line is open.

James Lieberman: Thank you. Thank you very much. So, again, congratulations. I think actually in businesses, in general, there are all sorts of challenges that come along is how management manages through those challenges and I think you are doing a commendable job, but it’s not infrequent that you see companies that are in these transition phases finding challenges that they can’t deal with and often causes them a great deal more stress. And I thought that Ron’s question is certainly about the consolidations recovered and then also the other questions about the color on the litigation. It was helpful in a sense that it sounds like you are working through pretty much all of the things that are on your plate. So I just want you to continue doing what you are doing and rolling things out.

I was looking for possibly a little bit more consolidation of operations a little sooner, but it sounds like there’s a good reason to keep things ongoing in these various other facilities so that you can perhaps meet particular types of orders and you don’t have to manage it in one facility. So I think you are probably right, if you feel that it may — takes another year or two years or three years to get it right, you may as well get it right rather than find yourself in a position where some important elements have dropped down to the equation. So I want to congratulate you for managing through this.

Jess Jankowski: Well, thank you, Jim. I think that we shouldn’t forget, part of the reason that this is dragging out a little bit has also been we need positive results. We need to generate positive cash flow to support these things. And generally, although our — this past year hasn’t shown you the venture level returns that you want to see in an investment, in a company like Nanophase and Solésence. But the returns on moving everything into one space and the infrastructure side of it aren’t necessarily, that’s what we are winning, going back and forth with where best to invest limited resources today and I think that will become more clear as we get into next year and as we start generating the cash we need to look at all this a little more analytically versus as you know it’s been a struggle this year.

James Lieberman: No. Totally. Thank you for your guidance and your navigational skills.

Jess Jankowski: Thanks.

Operator: Thank you.

Jess Jankowski: Thanks for question.

Operator: [Operator Instructions] One moment for our next question. Our next question comes from the line of Stefano Bow [ph] with private investor. Your line is open.

Unidentified Analyst: Hello and thanks for taking my question. First one is…

Jess Jankowski: Hi.

Unidentified Analyst: … with regards to the issues — supply chain issues you had this quarter, was there something unusual compared to the other quarters or it was just the known ones like the uneven or the timing or the issues coming from the sourced — customers sourced packaging? I mean, were the usual issues or anything special that was unusual?

Jess Jankowski: Yeah. Thanks, Stefano. I think generally, some of those issues existed the external side. On the internal side, it became clear that we needed to invest more in doing the kind of the planning ahead of time. Some of the lead times and some of these things are eight weeks, 12 weeks and we had a lapse where the people responsible for that were not really — they were a little too caught up in what we need to do in the next week or two versus what we are going to need to do in September when you are sitting in June and we have gotten to a point where some of these things got backed up. We also part of that led to inefficiencies in Q3 that we are still paying for in the sense of you could produce 90% of something and have it ready to go, waiting for the last piece, whether that’s a part or a label or a box or whatever and that is not an efficient way to produce, but it is an efficient way to make sure that you are satisfying your customers as best you can.

So those are some of the issues that we had to contend with that we don’t see being an issue going into 2024. Those were a little bit on the newer side. But I think generally, the investment in the entire function is going to have benefits and help us to avoid some of the issues we have been plagued with here in the past. I also did get your note the other day about the timing on the rights offering and there will be an S-1 that gets filed.

Unidentified Analyst: Yeah.

Jess Jankowski: That will have all the detail that you are interested in and this is an example of one of those things that, I can’t always answer these questions when they come out, because we are going to share something publicly with everybody, and fortunately, your question came out a date — last night, I think, or the…

Unidentified Analyst: I was afraid I missed something.

Jess Jankowski: Yeah. No. No. You did not miss that and we will — you will see a lot more at it in the next few weeks.

Unidentified Analyst: A second question, if I may. In terms of volume projection for 2004 — 2024 and also taking into account what was said in the last call about customers more and more placing last minute order because of the concerns on the economy and the consumer demand. Do you expect — still expected 2024 growth or do you expect more flight volumes?

Kevin Cureton: Hi, Stefano. This is Kevin. Thanks for the question. We — I think there’s two pieces to our business as we always talk about or have recently talked about. The ingredient side, which is related to our supply to BASF and then the finished product side, which is the Solésence business. As we have also talked about, there’s a lot of uncertainty from quarter-to-quarter still related to the ingredient side of the business. So we are not prepared to project or predict much on that side of the business. On the Solésence side of the business, we do see a little bit more strengthening of the demand than what we had seen previously. In other words, we are starting to see that lead time come back where customers are placing orders ahead.

As Jess mentioned, we have already gotten, for example, over $13 million or right around $13 million in orders for 2024 and that is a good indication of demand and their confidence in the sell-through of the products in 2024. So we still aren’t thinking that it’s like it was back in 2022 where customers were buying six months ahead, but we are seeing some good solid pre-orders, which is a good indication of demand in 2024.

Unidentified Analyst: Okay. Then thanks a lot and all the best for the remaining of the quarter.

Jess Jankowski: Thank you.

Kevin Cureton: Thank you.

Operator: Thank you. One moment for our next question please. Next question, one moment, comes from Ryan K. Your line is now open — with RKA.

Ryan K: Thank you.

Jess Jankowski: Hi, Ryan.

Ryan K: Gentlemen, a couple of questions here. I came into the conference call expecting that we were going to have good news on a breakeven situation for the quarter based on what I had heard last quarter in that, my questions were going to primarily circle around the legal issues. But as a result of the call and the — I have a couple of questions on the quarter. The first question I have is that I would appreciate to understand what the increase percentage-wise of capacity was from Q3 2022 to Q3 2023, just roughly. Was it 50% greater capacity to manufacture? Was it 30%? Was it 60%? What was it?

Kevin Cureton: Yeah. Good morning, Ryan. Yeah. I would say, actually, it’s probably more in the order of 2x in terms of our capacity to meet demand from Q3 of last year to now.

Ryan K: Okay. So double, and if I recall, we were halfway into the third quarter when, Jess said, it looks like we are going to have profitability for Q4. So I am curious what happened in six weeks that so changed the landscape?

Jess Jankowski: Sure. I was expecting that question. Part of it had to do with the timing of the closing of the books. I was — when we were talking, I was expecting a different result for the following month, we — partly due to some of the issues we have internally. Occasionally, we don’t get the given month close on a timely basis, so I had information that was basically my feeling, which normally, my gut on it is pretty good and due to the postponement of some of the shipments and the building of material that we didn’t ship and we ended up waiting for the last — the cherry on top of a lot of things, say, we took a beating that I hadn’t expected we would. And so that’s — essentially, that’s what it was, it’s difficult given the — we added a little bit of infrastructure in our accounting group to try to be responsive.

But given the probably more than tripling of transaction volume, it’s been hard to stay up with it in a way where you get the information, you get a lockdown then you spend a week analyzing it or several days and I wasn’t there. I did earnestly think that in — at that time, we were going to make it for the quarter and we were just very surprised for that. So for that, I apologize, Ryan. I didn’t — nothing — I mean, what changed was the problems that we have been talking about earlier really came into the — they bore full fruit that change and I hadn’t expected it to the extent that it did happen.

Ryan K: Well, let me — I just want to double check. The CFO duties are — along with the HR duties, along with the presidential duties are yours, correct?

Jess Jankowski: Yes.

Ryan K: All right. Mr. Barry Blank made a very, very interesting point about shareholder PR and not communicating with shareholders. My concern is not the PR. My concern is the credibility, okay? I have historically watched the company go through situations where it has set its own hair on fire a number of times and as a result has made changes to the organization, the — an operations guy came in, who should have been there two years before because you had operational issues. Now you have had purchasing issues, well, now we have a purchasing guy, okay? You are alluding to the fact that financially, you don’t seem to be able to get a handle on all the financial data in a timely fashion to predict what’s going to happen and I am kind of curious on are we going to have — is the next major fire going to be a financial one before we get a CFO or before we get HR?

I mean, I hear this story all the time about you guys don’t have the finances and to hire a CFO. You don’t have the finances to hire these people. You don’t have the finances to arrange to have the company go public. Yet the collateral — the cost of the collateral damage that’s inflicted by this attitude and this mentality, I think, is significantly worse. And I am just wondering if we add all that up, including the $600,000 that management received for bonuses last year, wouldn’t it be better to be a bit more pre-active — proactive and hire finance people, purchasing people, operations people before we need them as opposed to triage? That’s serious.

Jess Jankowski: Sure. I mean — in hindsight, you could answer that question, yes, really. Regarding the $600,000 in bonuses, that’s the stock compensation calculation based on Black-Scholes and part of that has to do with our volatility, part of that is effectively gone for now until the stock moves back up. But those are non-cash. They certainly cause dilution which, in many respects, is the same as cash. But for this company, it isn’t spending $600,000 and then going to raise $3 million, just to put that out there. I agree that the — it’s really a question of prioritization, and at this point, a couple of things. At the investor level on the calls, everybody wants a lot of information and that information is gettable, but it’s not always available on a timely basis.

It’s available timely enough for us to run the business. It’s not always available in time to talk to you about it and some of that is hard because everybody wants an answer to a question that doesn’t involve, I don’t know, not sure, need to get back to you. I understand that frustration.

Ryan K: Well, let me just ask, wouldn’t a CFO solve that problem? Isn’t it a CFO’s — okay, to have…

Jess Jankowski: I don’t. I think…

Ryan K: … to have that information readily available to make decisions going forward instead of trying to catch up with mistakes already from the past?

Jess Jankowski: I think it’s an issue. Yeah. Go ahead.

Ryan K: Guys, look. There is — let me — I have been an investor for over 10 years, okay? And every time I think we are out of the woods, we inflict another self-inflicted gunshot wound to some part of our organization. The — we made a hire now in the — on the Board of Directors of the guy who looks like, I don’t recall his name, but the most recent guy, looks like he has some experience with visibility of peeking around the corner. This issue of confidence, okay, in management is significant and it is one of the things I feel that is the iron chain around management’s leg that keeps shareholders from wanting to invest and so I don’t get why we are making the same mistake over and over. The definition of insanity is doing the same thing over and over again and expecting a different result. Gentlemen, I am sorry. This was absolutely and totally, in my opinion, unavoidable — avoidable, I am sorry.

Jess Jankowski: Okay.

Ryan K: And I am just sickened and disheartened by the lack of ability for management and the Board to grasp the gravity of the situation, take hold of the reins and make some preemptive strikes and avoid this stuff, because confidence is nowhere to be found. Woke up this morning to the stock at $0.72. I just don’t — I don’t see the confidence in management’s ability to get a firm grasp on the numbers to know where they are, to know where they are going and so I can’t help but feel I have a confidence issue with management’s ability to handle the BASF thing. I know everybody is saying it’s all right, we have got this just around the corner. Well, guess what? I am just waiting for the other shoe to drop. And you know what, guys, it — this has got to change.

I have — I cannot be more specific. I am trying to be as judicious as I possibly can, but the lack of shareholder confidence and I have to totally disagree with Mr. Lieberman about your ability to navigate these issues. I think you guys have done a horrible job and I think you have done a job predicated on, oh, my God, our house just burned down. Now what do we do? What is going to change? Why do I want to stay in the stock?

Jess Jankowski: Well, all we can do, we are taking what we believe is the most rational of course. We are focusing on the cost side of the business in a big way. Part of the reason I think that we have been running with our hair on fire has been that we grew so quickly and we did it with failing wire and duct tape that we are paying the piper for that to a degree. That said, we also grew really quickly, which is remarkable in the business we are in. So I think that I understand your frustration and I certainly don’t like repeating myself quarter-after-quarter when I can hear the melody is similar even if the lyrics are slightly different, but I do think that we have some opportunities here to turn this. I think that our profitability in 2021 showed us that we could do it with a much less efficient organization than we are working toward now and I think that’s a big piece of it.

I mean, it’s the volume. We still have the ability to turn up the accelerator on the volume. We don’t want to do that right this second, because we want to make sure that we are taking home more of what we are pulling in than been spending on growth. And that’s a legitimate — given the results, obviously, it’s a legitimate criticism and we are working our way through it. I expect to have better things to talk about at the next meeting and I certainly don’t dismiss your concerns or your commitment to the company. I know you and I have been involved pretty much the whole time that you have been an investor and I am not ignoring what you are saying. So it’s about all I could say without putting some results down to actually show a difference.

I think at the end of the day, for us to be as credible as we want to be in that every good management team should be, we are going to have to deliver results and that’s where we are — obviously, we have been struggling. The results on the topline have been good. The results in the market have been good. Those things we have proven we are good at. That’s the flood of awards we keep getting is we are good at that and catching up on the rest of it is something that we think we can do, we think we have known how to do it, it’s a matter of getting our organization to do it and it’s going to be a critical next number of months.

Ryan K: Well, gentlemen, please understand. My, well, awards don’t pay bills, okay? And the details that are required in this, okay? I believe are going to begin to make themselves known to you with what looks like, at least on paper a very competent operations executive who is, CFO. I don’t know anything about the purchasing person other than he’s a year late. So — and the fact that — part of my frustration, to be absolutely honest is that, I don’t see a 10-K still online. So I don’t know what — where the details are, okay? The only news that I heard that is better than I had expected was that we only spent $150,000 on legal fees. But the confidence right now to get this thing settled, okay? And get that off our plates, okay?

I cannot overstate the concern that I have about that as a red herring, because of the lack of information, I am following the case on the website for — on the legal website and all I am looking at right now is we are about to go into discovery. The judge has said, we have made every pre-trial motion that we can possibly make and they have been denied, all of them. And so now it’s put up or shut up and we are now going to get into the process of discovery, which is a financial rattle. The cost of discovery is astronomical. They can beat us. BASF can beat us with legal fees. So gentlemen, enough. Step up, take charge, make it happen. Please, no more excuses. No more excuses. Thank you.

Jess Jankowski: Yeah. Thanks, Ryan.

Operator: Thank you. One moment for our next question. I have a follow-up from the line of James Lieberman with Revere Securities. Your line is open. Mr. Lieberman, your line is open. Are you muted.

James Lieberman: I am sorry. Thank you very much. I appreciate the concerns and comments of the previous caller and I understand that there are concerns and challenges that the company has to deal with. I do agree with Jess that when you transition from a company that’s managing on a shoestring to a company that grew from about a yearly $9 million to $12 million to a $40 million company, there are a lot of transitions that need to be done. And historically, if you look at any of the various models out there when companies go above $20 million and go up to $50 million, there are other challenges. This company’s had to deal with all of those kind of all at once, moving from a shoestring to a more evolved and broader management undertaking.

That all is pretty understandable and natural and it sometimes sinks companies, but I think Nanophase is showing some resilience and understands what the challenges are. So, yes, time will tell how it plays out, but I am much more encouraged by what I am seeing in spite of — the some of the near-term disappointments and I think that I am all in, basically. I want to thank you all for your efforts. Regards.

Jess Jankowski: Thank you, Jim.

Operator: Thank you. One moment please for our next question. I have a follow-up from Mr. Barry Blank with J.H. Darbie. Your line is open.

Barry Blank: Hi. We have talked about the past and the past is the past. What are we going to do to make it better? Maybe you want to put some major shareholders on the Board. I certainly know Mr. Whitmore was on, and I mean, he has representation and thank god for him, because he’s been wonderful to the company. But I have been in the brokerage business for — I have got 50 years now and I have positions in over 30 microcap stocks, people. This is the hardest company in all 30 to be able to make contact. I flew to Illinois to visit you. I have over 40 clients with it. All I’d like to know is, number one, of course, I want to see improvement, but I would like to know if you could open up the lines of communication? I mean I don’t think it’s too much to ask.

I know I will never take up much of your time and I would never call you unless it’s something that some client wanted to know that was not inside information. I would never ask for inside information. But the communications has been so poor, it has been not existent and I’d like to see a change and maybe we get some representation from shareholders on the Board.

Jess Jankowski: That’s a good feedback. I understand your frustration with the communication and we will try to do something a little more active with it. Regarding on the Board, that’s something we could either talk about at our Board level, which we have a meeting coming up after tomorrow’s shareholder meeting or additionally, you also have the right to request to add if that’s something that you are interested in for the next meeting, which is something we haven’t seen much of and I certainly don’t want to have frustrated shareholders, obviously, but it’s something to think about.

Barry Blank: Jess, we are all on the same team. The shareholders are not the enemy. Shareholders are your friends. They can be behind you in that sort of thing. I stopped recommending the stock, because I don’t have any information. Also the performance has been poor, but even if the performance was good, I have, as I said before, the least rapport with this company of anyone that I have a position or any company I have a position and that’s all I want to say.

Jess Jankowski: Yeah. Thank you.

Operator: Thank you. One moment for our next question please. And I have a follow-up from the line of Ryan K with RKA. Your line is now open.

Ryan K: In rebuttal to Mr. Lieberman’s comment about this has not been done before onsets. This has been done thousands of times before at thousands of successful companies that have scale. Product is different, the mix is different. You guys aren’t doing anything, okay, that hasn’t been done. The problem has been is that, there has been an unbelievable reluctance to get anybody, okay, with enough experience and to be able to peek around the corner. And the fact that some people have accepted the excuse that, well, this has never been done before, is poppycock. The answers are out there. The people who know how to solve these problems are out there, okay? This has been done before. The commitment to finding those people and bringing those people on in a timely fashion before the problems hit the fan has been the reluctance.

So I could not more vehemently disagree with Mr. Lieberman and his assessment that this has not been done before and that you guys have responded heroically. Thank you.

Operator: Thank you.

Jess Jankowski: Okay.

Operator: One moment for our next question. Our next question comes from the line of Tony Rubin [ph], private investor. Your line is open.

Unidentified Analyst: Yeah. Hi. Good morning or afternoon, I guess or I am — I actually said I wasn’t going to call in today, but I just felt compelled after the, I guess, the gentleman who commented previously to share a perspective that, yes, I think, the company has had significant operational issues over a significant period of time and that’s been frustrating to me, and obviously, to all of us. However, having sat in some of those chairs and understanding the balance sheet, I understand that you were cash limited. And to be honest, I am very pleased with what sounds like a very positive and elegant solution in that shareholder’s rights offering, which will be fair to current shareholders and provide additional working capital in addition to, perhaps, belatedly, those key hires.

And further, I will say, I take comfort in the positive trends that you speak of both with respect to orders, new products, seven-figure customers and reordering trends. So, certainly, I wouldn’t say I am sitting here as a happy shareholder, but I am looking towards the future, not the past. And I think a number of those things that you mentioned on the call today or — and/or that shareholders’ offering will be very positive. And I just thought, well, I just strongly disagreed with the tone of that previous caller. I just, I guess, wanted to provide a counterpoint to that point. Again, understanding what it’s like to grow a company. So that’s all I have to say. So thank you and that’s it. Bye-bye.

Jess Jankowski: Thank you.

Operator: Thank you. One moment for our next question. And I have a follow-up from James Lieberman with Revere Securities. Your line is open.

James Lieberman: Thank you. This time, I am unmuted. So I do appreciate the last two comments. And I just wanted to clarify, I never said that this hasn’t been done before. I said that the kind of growth at a company like Nanophase has experienced often presents challenges that need to be addressed and that’s what I think the company is trying to do. Thank you all. And I have the same forward-looking optimism, yeah.

Operator: Thank you. I am currently showing no further questions at this time. I’d like to hand the conference back over to Mr. Jankowski for closing remarks.

Jess Jankowski: Okay. Thank you, Norma. As I said — as I have said, demand for our products has not diminished. We are working hard to get them out the door faster and to help more people to be healthier, feel better and look better with them. We are growing, we are winning award after award and we are winning new brand partners and customers. While we are not thrilled with 2023 bottomline performance, we continue to get excellent customer feedback. We have $23 million in shipped and confirmed POs after Q3. We added $4 million of those in the last few days. In the release, we said we left September with about $19 million in open and shipped orders on the books. Adding forward to that was a nice thing in a couple of days. We have got more than 60 total customers, eight of which are currently purchasing at more than $1 billion per year, another six at over $500,000 and they all have significant upside potential.

Consumer preference is on our side and we now have to execute on becoming more profitable within the strong business that we have built against the odds. We now have to deliver and we will. We are in this with all of you and we appreciate your patience. Thank you again for joining us today. We look forward to the next call when we will have more to discuss regarding our improvements to the profitability and stability of our business. Have a good day, everyone.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.