Solesence Inc (SLSN) 2022 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Nanophase third-quarter 2022 financial conference call. (Operator Instructions)

The words believe, believes, expects, anticipates, plans, forecast, 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.

At this time, I would like to turn the conference over to Mr. Jess Jankowski. Sir, please begin.

Thank you, [Howard]. Good morning to all of those of you listening live, and welcome to those who choose to listen later online. Thanks for joining us on today's call.

Our discussion will cover third-quarter and year-to-date 2022 results, the current state of the business, and some of our planning for the balance of 2022 and entering 2023. Kevin Cureton, our Chief Operating Officer, is also with me here today. In discussing our results, we're going to separate the gross profit discussion from the bottom-line earnings discussion.

The third quarter's margins reflected the trend we've seen in terms of our production costs and inefficiencies we've been discussing this year. We've also seen increases in raw materials cost and labor, some of which we recruit with price increases where the markets and contracts allow. I take solace in the fact that we've been able to achieve stronger margins in the past on lower volumes and with less sophisticated production equipment.

I'm confident that our gross margins will improve. Our bottom line was disappointing with a large Q3 loss, bringing us to a loss for the nine months, while the majority of this was a result of our depressed gross profit margin. Some of this was also due to strategic decisions we made and among other things, some was due to litigation costs.

Given the incredible market success we've seen with Solésence and market -- with Solésence products and market demand for minerals-based solutions more broadly, we remain optimistic about our future results and the acceleration of our continued growth. After those numbers, I'll expand on this further.

Unless identified otherwise, all numbers will be stated in approximate terms. We had $9.7 million in Q3 revenue this year versus $7.9 million for the same period last year. This brought us up to $29 million year to date at 9/30 versus $22 million at this time last year. Total year-to-date revenue numbers were up 31% in 2022 over 2021.

Within that, Solésence revenue was up 39%, and Personal Care Ingredients revenue was up 61%. Revenues continue to go in the right direction. Kevin will talk more about this. We're excited to see our strategy continue to unfold.

As in Q2 and Q3 -- Q1 and Q2, I should say, Q3 had a month during the quarter in this case, July, that was about one-third lower than the average month. And we also saw another month in August that was almost one-third above the average for the months within each quarter.

While we enjoy big revenue months, particularly as they could point to future run rates, they can also negatively impact margins when the other months in a given quarter are lower than expected. This has led to poor overhead absorption during the lower months as well as labor inefficiencies. Given that we can never get those efficiencies back, we're working hard to stabilize the business within the constraints of what we expect to be continued significant growth.

Additionally, we see embedded expenses come through for the expansion of our facilities and our operations team. This expansion was both necessary for us to get our cost down on the volume we currently have, as well as to support future growth with a much more workable footprint. In the short term, these increases added to some of the inefficiencies we've been tackling, leading to gross profit margins of 25% to 26% this year.

For the nine-month period year over year, this reflects a 9% decrease in gross profit margin. About a third of this decrease related to occupancy costs for our new facility, which we expect to better absorb as we continue to grow. And without which, I have to add, we wouldn't be able to pull costs out of the current Solésence business. Kevin will be addressing this in greater detail in a few minutes as well.

Of the remaining 6% shortfall, using 2021 margins as a benchmark meant that we had approximately $2.5 million fewer margin to cover R&D and SG&A expenses and to generate cash. Over the nine-month period in 2022, we had a series of investments in our R&D and SG&A capability that while helping to facilitate some of our growth immediately represented more of an investment toward future growth.

We saw R&D expenses, which includes engineering, increased by about 600,000 year over year; two-thirds of this related to staffing. This included the expansion of our engineering team to help with equipment installation and optimization and in addition to our formulation group. I characterize these as changes to both reduce manufacturing costs and to increase throughput.

The balance in R&D reflected increases in legal fees for patent and intellectual property development. This is strictly an investment in securing and expanding our franchise within our Solésence products. Our SG&A expenses were up considerably too, an increase of roughly $2.5 million year over year. Almost $1 million or 40% of this related to additional staffing, primarily within the sales, marketing, and business development teams. We added two new senior leaders in the first quarter, additional marketing resources, and more customer support people.

Related recruiting costs amounted to about 15% of this total, which we don't expect to recur. The bulk of these additions relate to future business development and demand acceleration with the balance helping us to catch up with our much higher sales volume.

Not just in sales and marketing but company-wide, our business has been impacted by the growth in our Solésence business in a way that is difficult to understand from the outside. I'd like to put a finer point on what we mean when we talk about catching up with growth. On an annual basis, Solésence sales have grown from less than $2 million in 2018 and 2019 to $7 million in 2020 during the pandemic then to $18 million in 2021.

At our current level, we will have tripled the size of a 30-year-old company in the past three years. Given the different business model for Solésence, which requires many more shipments of smaller quantities of material, while the size of our entire organization tripled in terms of dollar volume or transaction volume has been a multiple of that again. Just tremendous increase in volume and its related activity put a huge strain in the organization, but it was worth it.

Another third of the $2.5 million increase was due to a series of growth-related items. The enhancement of our marketing suites, as well as the increase in the number of users throughout the company plus a big push toward automation resulted in higher software spending. Also, we finally felt safe enough to start exhibiting at trade shows again. And we saw insurance cost increased significantly as a function of both our rapid growth in volume and assets as well as the general insurance markets.

Lastly, we incurred approximately 250,000 in bad debt expense, which is an unfortunate consequence of rapid sales growth with limited resources to apply to collections and regular frequent customer contact earlier in the cycle. We may be able to collect a portion of this in the future, but we're reserving for it now. With more experience and deeper staffing, we don't expect this to continue at this magnitude going forward.

Several other items, ones that I would characterize as being outside the normal course of business. This is the $530,000 we mentioned in our earnings release, made up most of the balance of the change in SG&A expenses. We accrued some contingency fees for what we hope will be a successful recovery of our staffing commitment during the pandemic under the employee retention credit. We hope to have this finalized early in 2023. Also, we saw increases in legal fees relating to our pending litigation with BASF, which I'll address in a few minutes.

Lastly, to follow up on our note in the release, we're in the process of investigating instances of cyber theft that appear to have begun in September '22 and persisted into October. There were six instances of cyber theft totaling $660,000. We've been engaged actively with federal and local law enforcement within the banking system and with our insurance company. We're pursuing a recovery of these funds aggressively. If unrecoverable, our insurance may reimburse 25% of the losses.

We elected to recognize a loss of $188,000 in Q3, reflecting the portion that occurred in September. We believe we've put controls in place to stop this from happening again and are undergoing an independent assessment of our related systems, consider that we'll be operating in a best-practices environment going forward.

It's been a rough quarter in these respects, but we can see our way through them. Our bottom line was impacted by a series of items that we don't expect to be repeated. This is highlighted even further when comparing year-over-year numbers, given that 2021 income included almost $1 billion related to the forgiveness of our PPP loan.

Regarding the strategic spending we made in 2022, in the end, we had a series of planned increases that we were unable to offset due to our gross profit margins falling below our expectations. Unfortunately, as it concerns staffing and some other strategic spending the expenditures are planned and incurred well in advance of current results becoming clear.

I'm sure that many of you are curious about the litigation we've been involved with, and with BASF, our long-term Personal Care Ingredients' customer. Given that this litigation is pending, I will tell you what I can and can't expand much on this during Q&A.

BASF filed a complaint in New Jersey in August, claiming that we are in violation of our supply agreement. They alleged several issues. The one having the biggest potential impact on Nanophase being a claim that our sales through Solésence violate the exclusivity provision of the agreement. Also in the same complaint, and I know that this may make a number of you more comfortable, BASF expressly states that it is not seeking termination of the agreement.

In September, Nanophase filed a complaint in Illinois court asking the court to declare contrary to BASF claims that among other things, the exclusivity provision of our contract does not prohibit Nanophase's sales of Solésence products containing zinc oxide as an ingredient. Although we believe BASF claims are wrong, we intend to keep negotiating with BASF in good faith to resolve these issues.

If this can't be accomplished and litigation proceeds, the ultimate resolution would be difficult to determine with certainty at this point in time. All this being said, management believes that Nanophase will ultimately prevail under the terms of the agreement and under governing law.

Let's switch over to similar upbeat [news]. As I mentioned before and this hasn't changed, your management team is optimistic. We'll share some of that good news with you during the rest of this call. We also intend to prove it with our results.

From September 30, after the end of 2022, we have more than $9 million in shipped orders and POs in hand. Additionally, in November of 2022, we have almost $16 million in 2023 purchase orders in hand. For the most part, there's demand -- there's future demand. This growth that has pushed us to become a $40-million company is all based on brand partners and customers that we were working with before 2021. We've nurtured them. We've given them new products to sell and the customers in their markets have demanded more of our products.

Speaking of good news. now I'd like to introduce Kevin Cureton, our Chief Operating Officer, to discuss where we are and where we're going in greater detail. Kevin?

Thanks, Jess. As always, I'll begin by thanking our talented team for their continued efforts in our work to not only transform our company, but to simultaneously transform a market.

The transition of our businesses just as detail from being a personality driven entrepreneurial company to a process-driven growth company has been challenging, even sometimes painful. Despite this challenge and realizing that we still have several steps to take to achieve our goals, we do remain positive about our future.

Please be reassured, however, that our positivity about the business in no way should be construed that we somehow do not take seriously the need to improve our profitability. We are absolutely focused on doing just that. To that point, I will speak a bit more about the steps we are taking to continue to grow aggressively while improving our profitability. What I plan to do today is to impart, set up a framework we will use to consistently communicate some of the important aspects of our business that will enable our continued transformation.

The areas that I will focus on are revenue, pricing, direct labor costs, and inventory management. Each of these areas offer excellent potential for near-term improvement and can ultimately reach the world-class status of our products. Please note that the primary focus of my comments will be our Solésence business.

Let's start at the top by talking about our revenue and pricing. Our growth story is clear and consistent. Our lead generation, which has helped to expand our customer base to well over 70 companies continues to be strong. As importantly, so expect to have a similar number of new launches in 2023 as we had in 2022, further evidence of a robust pipeline and that we are still being selected as the primary choice for premium skincare brands seeking to launch new product.

Looking at some industry-specific data, Nielsen recently reported in the publication Beauty Inc. The year-over-year growth in our segments, premium skincare, color cosmetics, and sun care together averaged over 30%. If you factor in our growth, we are clearly getting our fair share of the growth and a little bit more. In fact, our results in this quarter could have been 5% higher in our Solésence business, had we received packaging components from our customers as had been scheduled.

We expected this that supply challenge will continue in Q4 and beyond. With this continued supply disruption in mind, we are also continuing our efforts to transition more of our clients to turnkey, where we supply the packaging in addition to the product development and manufacturing services. By taking more control of the component supply, we will both improve top line and margin growth and help mitigate some of these surprises.

Transitioning now to pricing, our average price per unit improved by approximately 12% in the quarter over the first half of 2022 due to a combination of product mix and the implementation of price increases with over 90% of our clients. Unfortunately, we still suffered a net decrease of 1% in materials margin as we continue to play catch up with the materials cost increases earlier in this year. Our next price increases due to some contractual limitations are being implemented in Q1.

We will now turn our attention to another critical element in the COGS, our labor costs. Gross profit margins have obviously negatively impacted by direct labor inefficiencies and planned labor increases related to indirect labor, which increased our overhead cost.

Looking more at our labor inefficiencies, in our earnings announcement, I mentioned that we had seven figures of cost reductions that are achievable. We will see these improvements in two phases. First, improvements in staffing, labor planning, and secondly, automation. So starting with the labor planning, note that 70% of our direct labor is related to filling an assembly in our Solésence business, and that with the exception of our key supervisory personnel, a great share of that labor we use in that area is contract labor.

As a result, we can more readily flex our staffing levels up and down based upon demand and when we appropriately plan requirements consistent with the production we are expected to achieve. We believe these simple and effective methods will reduce labor cost by approximately 25%.

While we started to implement these procedures in Q3, we did not grow readily see the full impact into until October in part due to some labor increases, cost increases in our batch making processes. We have further addressed this issue and have seen the improvements in labor costs we expected in October.

The second phase of the labor cost reduction is automation. Here, we will achieve the full benefit of automation -- we won't achieve the full benefit of automation until we move our filling an assembly processes into our new facility.

Historically, we have been space limited, which restricted our ability to implement automation for the production of the Solésence products. Our space issues are completely resolved with our move and the startup of the new lines we have already purchased. We only have one of the fully automated lines or expect to only have one of the fully automated lines running in January. By middle to end of Q2, we expect to have three fully automated lines, making over 90% of our demand.

Through automation, we expect to conservatively reduce our labor costs another 25%, which would mean that by the end of Q2 2023, we would have cut our per unit labor expenses by 50% from current 2022 levels. Of course, realization of the cash savings from this work only occurs by reducing the total labor or redistribution of the total staffing over more units of production, which we are currently doing, while we are also significantly reducing overtime that was previously needed to reduce these units.

Moving on to the balance sheet. As we noted in the earnings announcement, we've made some significant changes to our staff in the supply chain management and manufacturing roles. While more remains to be done, we are excited about a positive impact our new leadership has had.

We, of course, need to sustain these improvements, which mostly have been in improving inventory controls and creating a stable organized execution of the shipping and receiving processes. We have done this by the way, while consolidating all of our warehousing activities into our new facility during Q3.

During this quarter and the several quarters to come, and when I say this quarter, I mean Q4, we are planning to turn our attention toward rightsizing our inventory once again. The work here is just instituting the basic blocking and tackling, such as improving the management of procurement processes like resetting reorder points and clarification of lead times. But when these actions are combined with more rigorous manufacturing planning, we are also better able to manage materials' requirements.

As a result, we should have a meaningful reduction in raw materials inventory and within the next few quarters get inventory turns up to four, which will be a significant improvement for our company. I'm sure all of this will generate a lot of questions, so I'll stop now to make sure we have plenty of time for Q&A, but I'll complete my statement simply by saying your company has grown to be one of the most impactful businesses in the UV-protection segment as witnessed by the two awards that we received just last quarter.

We think these actions outlined above are planning to move us from just being an impactful company to having sustainable market success, which ultimately improves people's lives and shareholders' returns. Back to you, Jess.

Thanks, Kevin. I know everybody wants to get to the Q&A, but I want to reiterate a few things. Aside from our revenue growth, nobody's happy about 2022 results to this point. While we're working a process to tighten things up and our market is a few quarters behind, we have supported the build-out of an infrastructure that we eventually expect to support a multiple of our volume. There's more work to do on that piece of our development, but the people we've added and the facilities we've secured, both of which have increased fixed spending this year are in place.

Essentially, we forced a strategic shift over the past few years on a bottoms-up basis. A few of us muscled their way through building a new $20-million business through great ideas, strategy, and toil, that's on its way to take off. The only way that's happened is with an expanded infrastructure with the people side being the key.

This comes in a few parts. First, we have to fuel the fires of growth. This company won't triple its volume again without expanding marketing and sales efforts. This year has been the first time since 2019 that we made any new investment in our business development process. We expect that these investments, which are certainly stressing our bottom line today, will pay off in a big way with growth late next year in 2024 and well beyond that.

Second, we have to get our manufacturing operations in order. [Multi-business] investment has been done in 2022, albeit recently. We will continue to work here to create a production backbone that can support a multiple of current sales. It's been a bumpy ride than we expected, but we believe our progress will become obvious in terms of increased margins and inefficiencies and supporting increased volumes.

Lastly, we're working to shore up our IT, finance, and accounting infrastructure, all the things that we need to do as our growth adds to our profile, and of course, the challenges relating to that. Additional functionality and the ability to rely more on our IT infrastructure rather than hands-on processing are critical areas of focus. While we do this, we need to work to secure additional financing capacity and to position ourselves for an uplisting to allow us to gain greater exposure to the investment community. This is going to help us to become more profitable and to grow faster.

What we've really been talking about today is two things, how to make all of this growing business we built more profitable, which is a today issue, and how to accelerate our growth even more through our investment in new business development and infrastructure.

Now we'd both be happy to answer some questions so that we know that most of our investors listen to the webcast to review the transcript after the live call. We'd like to invite those participating in today's call to ask any questions you might have or to share your comments. Howard, would you please begin the Q&A session?

Yes, sir. (Operator Instructions) James Liberman, Revere Securities.

Hi, this is Jim Liberman. Thank you very much for this very detailed analysis. Hello, there. And I'm actually really impressed by how you're managing such an extraordinary transformation of the company. And in an environment where most companies are dealing with difficulties in terms of demand for their product and acceptance of their product, you're seeing the reverse.

You're seeing an extraordinary increase at a time when there are so many other dislocations plus the integrating in a new facility, there are massively challenging for any company. And I think you're doing a remarkable job. And I was actually surprised you're able to do it with as little -- as minimal interruption as you've been describing.

I wondered if you could describe a couple of other things, however. Regarding the -- just my question about the BASF, which I know you can't comment on, but the old agreement with BASF was about totally different technology. It didn't involve this new generation of technology. So are you allowed to comment on that at all that they should be just seen in a -- it's not even apples -- it's apples and oranges, it's not the same comparison, not the same issue. Are you able to comment on that all?

Well, we don't want to get into too much detail because of the situation. I would say the crux of a lot of this is that we -- that contract as far as we are concerned, involves the sale of ingredients, active pharmaceutical ingredients or APIs, and their perspective on it has been -- it doesn't matter where they go, we think we as BASF should control that. That's never been our understanding of it, and that's not how we're treating it now.

Okay. I know you can't say more than that. But another thing, as you see the new facility shaping out and all the investments you're making into improving the efficiencies, what kind of profit margins could you proceed down the road when everything is humming, say, in a next year or two?

Well, thanks, Jim. I really appreciate your comments. This is Kevin. We'll be a little shy on making too many declarations on profit margins, but we do expect that our gross profit margins that we've had in the past can be achieved on a much larger business. So north of 30%, 35% gross profit margins that we've had in the past is part of our objective.

Okay. No, that's fine. I know that it's premature to be too specific. And another thing is, how do you see your turns in inventory shaping out? Do you -- can you see three turns a year? I'm just trying to get a sense of with your inventory build, how you see that being able to finance your growth going forward?

Yeah. No, great question. And again, I do think there we can be a little bit more transparent, and we do expect that we'll get north of three turns per year. It'll take us a little while because we did build some raw material inventories based upon some concerns around supply and availability. We're going to be able to transition a bit more away from raw materials -- large raw materials inventories toward WIP and then ultimately even reducing that over the next couple of quarters. So getting to a three to really, as I mentioned in the discussion or in my comments, four turns per year is our objective to achieve that sometime in 2023.

Thank you very much. I wanted to just leave with one other note and that I'm so impressed with the words you're getting on a world basis with the response to your products. And this could be an incredibly significant company even from this point with this growth so far. I could imagine this -- you're being over $100-million company in a few years. Congratulations to be able to set yourself up in such an attractive way. Thank you.

Thank you, Jim.

Thank you. (Operator Instruction) [John Henderson].

Sorry, I didn't hear my name. So I'd like to share the enthusiasm of the previous caller, but I have to be upfront. I'm getting pretty frustrated with the lack of progress. You guys just seem to have one problem for the next each quarter, and there needs to be more accountability. And you guys really need to come up with a better plan to get the company back to profitability.

As far as the stock goes, again, I'm going to reiterate what I said last conference call. You guys really need to make this a focus. I'd also really like to see insiders step up with some buying in the open market along with the Board members. The stocks come in about 50%. And the only real way for investors to get the confidence in the company getting to the next level is to see you guys not be having sales like we saw last week, but actually see you guys step up and buy stock.

So with that out of the way, my first question is when do you foresee an uplisting occurring for the stock?

Hey, John. I'm not sure -- not to mislead anybody, I think it's quite possible we could do something next year relative to an uplisting of -- and we haven't decided yet whether it would be something on AMEX Arca or another exchange or NASDAQ. And there are some -- lot of rules to be complied with that we haven't yet tested. We also have just given what's been going on lately, it's just an added degree of pressure and busyness and everybody internally.

My goal had been to be further along in the past this year on this, but I don't have a solid answer for you. It's a big deal. It's important to us. Internally, it's important, we know, to you, and all of our investors as well as our Board of Directors that we do that. It's just a question of doing that in the right order relative to getting the other things that we need to get done in the meantime.

Okay. I can appreciate that. So second question, Solésence 2023 prospects, I know your growth rate has slowed down. And I understand that you had some additional issues in terms of packaging. Can you speak to the demand, the expectations that you have for 2023 growth rate for Solésence?

Sure, John. We do expect that we'll still see a similar year-over-year growth rate to this year obviously against a bigger base of business. But the thing that I mentioned in the comments was essentially that we are seeing similar numbers of launches, what I didn't say is that those launches are bigger. So you'll see a little bit different mix in our business as we go larger customers, larger launches, and ultimately, a bit more globalization as we get through much of this year into the second half of next year.

Okay. Thank you.

Thank you. (Operator Instructions) I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. -- I'm sorry, we have a follow-up question for Mr. Lieberman. Mr. Lieberman, your line is open.

The question is, of course, has been regarding an uplifting, and of course, I do agree that it's more of a process and it's got to be done in the right framework where the right person and group of people who are in. So you can do the right reporting, but also that addition to the company would be -- would add to the company's culture and not detract from it in any way.

That being said, is it possible that someone - some company out there might want to buy you out? Or can you comment on any interest because of how well you positioned yourself in the sunscreen space right now?

We can't really comment on any interest there. I'm sure it's possible. I do think that at a -- trying to remove the intensity from that question, I would say that none of us feel that the value that we have right now that we've achieved in the market in terms of market capitalization reflects the actual value of the company. So if that ever were to happen, in my mind, and I obviously I can't speak for the Board of Directors and everybody, but I think that the -- I think there's a lot more valuation to be had here before something like that were to happen, Jim.

I agree. I think you're setting things up really well. Thank you again.

Thank you. John Henderson.

Follow-up question is, you guys every quarter now are having a problem, where you're having a killer cooler month followed or preceded by a month that's a lot less than that record month. You guys seem to kind of have a business that has its ebbs and flows each quarter, and you know, so can you again talk about with fully knowing just the type of business that you have, number one, has that get smoothed out operationally?

And what's your plan to deal with that in the future, so that you can actually get back to profitability? I mean, I know you mentioned all these other changes, is it just that? I mean it would seem as though it just -- none of this should come as a surprise that you have these types of ebbs and flows within the quarter, but every quarter comes, and it seems like you guys are surprised?

Yeah. So John, a couple -- there are a few questions there. I'll start at the top, and I think I mentioned briefly, Jess also mentioned toward the end of his comments, it does start with the having the right team in place, and that's really been one of the focuses that we've had in Q3 in terms of making some changes in our supply chain team and our manufacturing team.

We still have some work to do there relative to making sure that not just at the leadership levels, but you as we've grown rapidly, to some degree, we've surpassed some of the -- we've got wonderful people, let me just say that before I say my next comment. But we have surpassed some of the skill sets of younger folks, and we need to add to that middle-management tier in order to be a little bit more effective in all of these areas.

That notwithstanding, there've been a couple of things that have been really good about some of the other commercial leaders that we did already add to the company and changes we've made in terms of our order processing procedures and the time procedures. So we we did change our lead time standards to give us more visibility relative to what is coming down the path so that it's less of a surprise.

We also are making some changes or have made changes in terms of confirmation where the confirmation relative to -- in our business model, we receive some packaging from our clients, and obviously, for the types of products that we make, if you don't have the package, you don't have the product. You can't make the final product, at least.

And so, we've established that as part of our time standards as well. I mentioned during my comments, the idea of moving further and further toward turnkey because what turnkey essentially is, John, is we take on that accountability for sourcing the packaging. We do that for our, believe it or not, our largest clients. The multinationals we work with always want us to work that way, some of the smaller ones don't. And that is part of the process of improving our controls on what is actually happening on a month-to-month, quarter-to- quarter basis relative to production.

And I'll finish up by just saying, just mention the book of business that we already have for 2023. We already have very good visibility on the requirements, the demand for Q1. And another month or two, we'll have even more clarity on the demand for Q2. And that's again part of the lead or seasoning the lead time changes that we've made, that will allow us to do a better job in smoothing out results and getting more consistent performance on a month-to-month basis.

And one or two other final ones, and then I'll cede the floor. So in terms of CapEx, heavy equipment to really get automation completed and the new facility, what are you looking at in terms of dollar-wise needs for CapEx in 2023?

We're evaluating that, John because of for one reason and one reason only, and that is that we want to be really focused operationally on getting the fill an assembly operations running and get our benefit from that. So that reduction in labor cost is a big focus of ours. And so, we're not moving as fast as we had originally planned on some of the other capital because we want to get that right. We want to get what we've already invested in right.

And so, I'm going to unfortunately avoid giving you a straight answer on that. But just to say that, yeah, we still have another seven figures in capital investment that we need to make, but we won't be leading that, we'll be doing a little trailing of that investment in order to make sure that we get some improvements in the investments that we've already made.

And then on the inventory front, final question, what are the plans to kind of -- early in the year, you had obsolescent inventory issues, you may have to write off some things. I mean, it does seem as though again, that's a recurring pain point as well. So can you guys get to the point where you can be a well-oiled machine on the inventory side? Because it really does seem to just be -- I'm not sure if it's just you don't have the right people with the company to kind of really get this right, but for a manufacturing company, it's -- I mean, pardon my frankness -- unacceptable to kind of be having the issues you guys are consistently having.

Yeah. No, we agree with it. It's unacceptable. Why we mentioned it as part of what we're focused on, again, just going back to the beginning of the last comment that I made, it does start with having the right team with the right skill set. And we do believe we've made these within the supply chain team, we've made some changes there, that does get us on the right track.

And then again, tying that into proper manufacturing planning so that the requirements are crystal clear in terms of what we need to have on hand and making sure that we're making the right things at the right time. So yes, we do believe we can get that to being a well-oiled machine. It has to be. And it's again, one of the advantages of the consolidation of warehousing into one-facility consolidation of the filling an assembly operations into one facility is to be able to address those types of issues that you just mentioned.

And then as far as Q4 goes, is it -- are you guys expecting it, I guess, $ 9 million-ish? Is that the expectation revenue-wise for the quarter? It seems like it's going to be down a little bit sequentially.

Yeah, open orders and shipped orders will be in that range. Again, what we are suffering from, and I want to make it clear that the $9 million isn't referencing where that number -- somewhere in that range isn't referencing to the actual demand. It's what we can actually ship based upon getting components from our clients. So the demand is higher than that, but we're likely to be in that range.

But when do you foresee that issue? I mean that's going to turn off clients wanting to do more business. Is that something that's fully resolved by Q1? I mean, what's -- sorry, there's a lot of moving parts here. (multiple speakers)

That issue, John, is not related to us as much as it's related to the clients that are sourcing their own components. So it's the -- in terms of turning off a client, it may turn the client off of the component supplier or it may push them in a direction to allow us to go ahead and operate the turnkey business.

Correct.

But that's something that we don't see it with our largest customer there because we manage it all. And so we know what our expectations are, et cetera.

So that's (multiple speakers) so on that on that particular pain point, like, when can we expect, I mean because you're talking about potential plans to kind of do turnkey, do you have visibility on when that pain point is going to by the guys that you're using be resolved? Or you just -- you can't really tell at this point that that will be something that is as a challenge that you guys can get passed like Q1 or Q2.

The majority of our business still will not be turnkey in 2023. So there are still a lot of clients that -- and again, when I say majority, I should be saying numbers more versus dollars. But that because they're smaller customers, they want to try and save a few bucks by sourcing the components themselves. We're not the only one in this industry that has that as a risk, what we didn't do and what we are doing now is make adjustments to our schedule based upon understanding the status of the components.

So that is something that we now have done. We're making those adjustments proactively. And in terms of just some of the other comments I made around labor utilization and labor planning, we are able to scale up and scale down on the relative labor in order to mitigate some of the costs that might be associated with a miss from our -- one of our clients in terms of getting us to packaging on time.

So we have to make -- we have to build in the processes and procedures to address something that is very common in the industry, and we've done that. So we would expect that as we enter 2023, we'd see far less of these disruptions just based -- in terms of consistency and performance, just based upon not getting packaging components from our customer.

Okay. Thanks, guys.

Thank you.

Thank you. (Operator Instructions) I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Jankowski for any closing remarks.

Thank you, Howard. I have some closing remarks, also accommodate something that may have been lost in our press release because of all the information we had to pack in this month in the very last few lines. We're hearing a lot of talk if all of you are investors. Kevin and I are investors but much more passively than you I imagine. And everybody's talking about what happens next year with the economy. Are we going into a recession? Is it this? Is this that? And I think one of the things that keeps us jazzed about this business is that we grew. We actually exploded in growth during the pandemic. And with the growth we're seeing in the various areas in the beauty industry that we play in, they have shown themselves to be pretty resilient relative to that kind of thing.

So in terms of going into next year, pretty exciting, and I thought something I'd want to mention. I just followed the saying our top focus right now is improving our margins to fund more growth to keep stoking demand for additional growth opportunities. We're also working to communicate what information we can, when we can to all of you, our shareholders and stakeholders. It's part of a journey. We want to make sure that all of you are as excited and optimistic about our future as we are.

Again, what we've been talking to today boils down to two things, how to make all of this growing business we built more profitable and how do we accelerate our growth even more through investment and new business development. As you've heard us say, we're on a path forward that we expect to help us enhance our value in all respects, and we're optimistic about the rest of this year 2023, and beyond that. I'll leave it there, and we'll look forward to our opportunity to discuss the business with you again next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.