Nanophase Technologies Corporation (PNK:NANX) Q4 2023 Earnings Call Transcript

Nanophase Technologies Corporation (PNK:NANX) Q4 2023 Earnings Call Transcript March 21, 2024

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Operator: Good day, and thank you for standing by. Welcome to Nanophase Fourth 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 this 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 the President and CEO, Jess Jankowski.

Please proceed.

Jess Jankowski: Thanks for that introduction, Carmen. Good morning, to all of those listening live and welcome to those who choose to listen later online. Thanks for joining us today for a discussion of our full year 2023 results and more importantly, an update of the state of the business and our outlook for 2024. We’ve seen many changes over the past year and we believe we’re beginning to see some of them pay off. Kevin Cureton, our Chief Operating Officer, is joining me on the call today. We have prepared comments. Then, Kevin and I will be available for some Q&A afterwards. Today, we plan on covering 2023 results, the ongoing litigation between Nanophase and BASF and critically, how we position ourselves to turn the corner to sustainability and profitability going forward.

An aerial view of an industrial complex being stocked with engineered solutions.

We’ll spend the bulk of our time today talking about the future as it reflects why we’re all here. In discussing this, we’ll also share some of the major efforts we’ve made to measure and manage to our 2024 plans through KPIs and a high degree of focus on critical areas that have presented chronic problems in the past. In Q4, we added an experienced purchasing manager followed by an experienced buyer in Q1 of this year. We’ve seen the impact of our new VP of Operations supported further by our purchasing adds yield a higher degree of control and greater efficiencies in our operations. We’ve also just concluded an additional financing, which will give us some breathing room in terms of supporting the rapidly expanded working capital demands that our incredible growth has placed on our companies.

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Q&A Session

We expect the degree to which this will help to enhance our operations this year to become obvious to everybody in the coming months. Before we continue, let’s walk through the numbers. Unless identified otherwise, all numbers will be stated in approximate terms. Performance in Q4 2023 was similar to Q4 2022’s, both falling short of our plan and our expectations. We saw $8 million in 2023’s fourth quarter versus $8.3 million in revenue for the same period in 2022, and losses of $2.1 million and $2 million respectively. A marked difference between the two periods was that Q4 of 2023 represented a period of conscious investment in restructuring the business for greater efficiency. We were also able to lock down our inventory for 2023, which had historically been difficult.

We invested a great deal of time in working through raw material shortages, helped substantially by the addition of our new purchasing resources. This hurt us in Q4 and the first part of this quarter but we believe we now have it under control and have adopted a systematic approach to our supply chain management backed by experienced professionals that have already paid for themselves. Looking at the full year comparable numbers, we had $37.3 million in revenue for both full years 2023 and 2022. In terms of revenue mix, Solésence revenue was up 9% to $25.2 million in 2023 while personal care ingredients and advanced materials were down by 17% and 9%, respectively. Some of our struggles with working capital along with material shortages kept our Solésence growth lower than it should have been and lower than it will be in 2024.

We were unable to satisfy all of the demand that we’ve had for Solésence finished products, and demand continues to grow. We see the light at the end of the tunnel here and expect these shortfalls to be much more manageable as we get further into 2024. The Solesence growth was largely offset by the 17% reduction in year-over-year BASF revenue I mentioned amounting to $1.8 million. While we expect BASF revenue, which as you may recall relates to sunscreen active ingredients to stabilize, it is something over which we have less control than in the finished products business we sell through Solésence. Analyzing the dynamics in each market, ingredients versus finished products, it’s easy for us to draw the conclusion that our development of Solésence was the right strategy to maximize the value of our companies.

For the full year of 2023, we had a net loss of $4.4 million versus a net loss of $2.6 million for the same period in 2022. This trend was certainly a disturbing one and one that we believe we’ve addressed effectively for 2024. I’ll cover operating expenses first, then discuss our vision for improving gross margins and throughput materially in 2024. R&D expenses, which include engineering, were up by about 26% year-over-year. This was due to increases in staffing, product testing and intellectual property development. These things are necessary to allow us to remain in front of the prestige cosmetics market as well as to support new technologies, which we expect will keep us in the rapid growth curve we’ve enjoyed with Solésence to this point.

We expect to see these expenses flatten in 2024. In terms of SG&A expenses, they appear to be relatively flat year-over-year, but they included some items that we don’t expect to repeat. The greatest of these are legal fees relating to the BASF litigation. They amounted to $1.3 million in 2023 versus $400,000 in 2022. Almost 90% of the $1.3 million in fees were incurred during the first nine months of 2023. Related fees for Q4 of ’23 amounted to $130,000 or 10% of the total showing a marked decline. Legal fees have gone down as we continue to work with BASF toward a mutually beneficial solution focusing on business issues more than legal issues. While it’s not over till it’s over, we’re optimistic that we’ll resolve this litigation soon and be able to focus all of our attention and energy in building the value of the business.

Not reflected in any of our 2023 SG&A numbers is the reduction in force and rationalization of operating expenses we implemented during mid Q4. We expect to see people related expenses go down, which will contribute further to what we expect will be a reduction in overall SG&A for 2024. We also had an additional $500,000 in interest expense due to increases in interest rates and our need to finance our expanded working capital demand mainly through debt. Our recent financing will help us to reduce our dependence on debt in this regard along with expected interest expenses. In addition to manufacturing efficiencies, which we’ll touch on in a minute, all the things we just discussed will contribute maturely to 2024 profitability. Now I’d like to address the changes we’re implementing in manufacturing that we expect to yield material improvements.

A function of having to wrestle with our working capital needs to such a great extent in 2023 was that we were forced to delay a series of relatively modest capital equipment enhancements that have hard cash payback periods ranging from 15 to 30 months, not to mention the advantages of higher throughput in helping us to capture our growing demand. I have three projects in mind that given our recent financing and the stability it has added we’re currently completing. The first is the installation of a lab that will allow us to complete more of our microbial testing in-house. Every run of Solésence products that we produce currently get sampled and sent to an outside lab for microbial testing. This is a time consuming and expensive process. Our QC costs have climbed as we’ve grown and more and more batches, a good thing, have resulted in higher and higher testing costs, as well as the associated delays with sending samples to outside labs.