Solesence Inc (SLSN) 2006 Q1 法說會逐字稿

Good afternoon. At this time, I would like to welcome everyone to the Nanophase Technologies first quarter 2006 conference call. [OPERATOR INSTRUCTIONS].

During this conference call, the words expect, anticipate, plans, forecasts, and similar expressions are intend 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 that could cause actual results for future periods to materially from those expressed in the 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 Nanocrystalline materials, changes in development and distribution relationships, the impact of competitive products and technologies, possible disruption in commercial activities occasioned by terrorist activity and armed conflict, and other risks indicated in the Company's filings with the Securities & Exchange Commission. Nanophase Technologies undertakes no obligation to revise forward-looking statements to reflect new events or uncertainties.

I would like the turn the conference over to Mr. Joe Cross, President and CEO of Nanophase. Thank you, you may begin, sir.

Good afternoon and welcome to Nanophase's conference call to review the first quarter of 2006.

From a revenue view we had a strong first quarter with 24% year-over-year revenue growth and achieved the highest first quarter revenue in the Company's history. Jess Jankowski, Nanophase's CFO, and I will be hosting the session. To begin our discussion, Jess will summarize the financial highlights of the quarter. Jess?

Good afternoon, and thank you for your continuing support of Nanophase. As Joe said, the first quarter set another revenue record and we continue to expect good things for 2006. As I review the financial performance of the Company I intend to only address significant areas comparing Q1 2006 to Q1 2005. All numbers will be in approximate terms for ease of discussion. Details are included in the financials accompanying today's press release.

Revenues for the first quarter were up 24% to $2 million this year versus $1.6 million last year. Again, the lion's share of the growth is from product sales, a full 96% of Nanophase's Q1 revenue. The first quarter of 2006 also proved to be the biggest first quarter of Nanophase's history. Gross margin continues to grow out of proportion to product revenue growth. This is a sign of our business model, as we discussed in depth in March's call, delivering as promised. Recall that our fixed manufacturing cost structure, the minimum required to be in the game, does not need to grow until we achieve a multiple of 2005 revenue. This is a key component of our past cash flow break even and profitability.

In the same vein, some of you have expressed concerns as to how demand for the product will remain strong, how pricing power will stay solid, and how Nanophase's materials will avoid commodization. Well, we're not selling materials that can be comparison shopped by any measure. We have a strategic platform of materials development capabilities that is unique.

Each nanoparticle we make from zinc oxide for sunscreens to Ceria for CMP polishing looks and performs differently of other materials of similar composition in the marketplace. It starts with the particle and the controlled way we make it. That's the first differentiator. And this is another key competitive advantage. We take a unique particle and adjust the surface chemistry either in process or through a surface treatment. Through these complementary technologies, we have developed to the ability to disburse these materials in various media, from water to organic. To our knowledge no one else has these capabilities. We simply aren't seeing them in the marketplace. Our materials, by definition, cannot be commoditized. We can't stress this enough.

BASF, Rohm Haas, and ALTANA rely on the leverage provided by our capabilities in concert to gain competitive advantage in their respective markets. We staked out and protected our market position well. In a nutshell, regardless of the spin supplied by others all nanos are not created equal. Our customers understand this very well, and it is critical the investment community consider this also.

Moving on, I also want to ensure that you understand that we are continuing to make bottom line process as we go. They is not necessarily apparent comparing the relative losses from Q1 of '06 to Q1 of '05. Our loss appears to have grown about $130,000 year-over-year.

Two things took place this quarter that negatively affected GAAP earnings. First, we abandoned two patent applications along with foreign counter parts. We expect neither to have an impact on our business nor the protections afforded relative to our competition. One patent applied to particle separation technology that we've out grown, while the other in the view of the patent office is redundant when viewed against Nanophase patents already in place. We wrote these off in Q1 in the amount of $111,000.

If it cost nothing to continue these patents along the path we would have kept going down that path. Every pit of IP protection we can get adds to the formidable barrier of entry that surrounds this business. Occasionally, as in these cases costs of continuing in the path to grant outweighs Management's estimates of value gained.

The second and more pervasive issue is the advent of FAS 123-R. The requirement we begin expensing stock options in 2006. To put this in perspective, in the first quarter of 2005 we had less than $11,000 in equity compensation expense. This quarter we had $195,000 of equity comp expense of which $115,000 relates to this new standard. The balance was composed of expenses relate to go a change in board director compensation which had added a component and past issuances of performance share grants whose expense swelled this quarter due to growth in the stock's value. In total, the Company lost $0.09 per share this year of which $0.02 relates to the two items just discussed, versus $0.08 per share last year.

Note that Q1 depreciation and amortization amounted to about $300,000. Equity compensation expense about $200,000, and nonrecurring patent expense amounted to $111,000 of the Company's $1.5 million loss for the quarter. Net of these expenses, the loss would have been $900,000 or $0.05 par share versus $1.1 million or $0.06 per share in the same quarter last year when adjusted for the same factors. Taking another view, these Q1 '06 non-cash and patent items amounted to 40% of the company's operating loss. In other words, we're continuing to see progress where it matters on our path to becoming cash flow positive.

Moving to the balance sheet highlights, Nanophase ended Q1 with $7.6 million in cash and investments. In terms of accounts receivable, 90% of this balance is made up of receivables from BASF, Rohm and Haas and the CIK license fees. The same customers accounted for a cumulative total of 90% of our Q1 revenue. Equipment and leasehold improvements netted the 7 million in total which included 280,000 for capital additions in Q1. Capital requirements for the balance of 2006 will be mainly composed of the build out of the equipment outlined in the November 2005 loan of $1.6 million from Vick Chemie, a subsidiary of ALTANA We continue to be excited about the possibilities of this funding will bring to our strategic marketing attack.

On the liability side, the Company now has about $1.7 million in total debt. 60,000 of this represents the note in favor of BASF that used to finance equipment for sunscreen nanomaterials. Management expects to retire this loan in Q2. The balance of this debt reflects the previously mentioned $1.6 million loan from Vick Chemie. The debt discount and offsetting deferred other revenue balance referred on the balance sheet relate to the required accounting treatment under APB 21 of this loan and have no cash impact. Thanks for your attention, and I would like to turn things over to our President and CEO, Joseph Cross.

Thank you, Jess.

As we stated previously revenue growth is management's first priority. We achieved 50% product revenue growth during 2005 and recognized that such growth rate is necessary for the Company to achieve financial goals. First quarter is a solid start to fiscal 2006 and one the Company hopes to build on. Since we had a lengthy conference call about one month ago, and covered the Company fairly broadly, today I would like to confine my comments to revenue growth and first quarter events related to that. If you were not able to attend the previous conference call, I would encourage to you read the transcript that's on our website under Investor Relations.

To be clear in this discussion, Nanophase has what we term market partners as well as customers. Market partners include ALTANA, BASF, Rohm & Haas Electronic Materials, CMP technologies, and Alpha Azar. With market partners we have long-term exclusive relationships for specific markets, or fields of application, where we provide the nanomaterial products and the market partner offers application development, global sales and distribution as well as focused new product development for the respective markets based on their intimate knowledge of customer market needs. Customers are typically obtained through the Company's business development initiatives, have little or no exclusivity, and order nanomaterial products from Nanophase.

To begin, I would like to cover progress with the market partners and then discuss new customers. As we have stated before, we believe this market partner revenue growth alone will drive Nanophase to profitability. Beginning with BASF, the Company's longest term market partner, our relationship and business continues to grow. After growing about 24% in 2005, the original sunscreen product which BASF brands as ZCote, continues to show strength during the first quarter increasing year-over-year. On a separate but parallel track, the new product introduced last year, which BASF brands as ZCote Max, is on product with a new product launch plan and we anticipate revenue growth during late 2006 well into 2009.

Again this product utilizes special nanoparticle coating that was developed by Nanophase to provide high loading levels and formulation compatibility with European and Asian cosmetic formulations. BASF anticipates this brand will grow to a level approximately equal to the current brand.

BASF also plans to introduce two additional products in the ZCote Max line around September 2006 based on nanomaterial products from Nanophase. We cannot discuss the details of these, but expect positive material revenue impact during late 2006 and into 2007. In total, exiting 2006, we should have four distinct products marketed globally by BASF versus the original one sunscreen product which provides Nanophase a solid base of existing and growing revenue from current products and significant revenue growth opportunities moving forward in new products.

Moving to ALTANA Chemie we are continuing focused vigorous product development in Germany and the U.S. During the first quarter, ALTANA released three new products which brand as Nanobooked, targeted to UV protection for industrial coatings. They plan to announce an additional three new nanomaterial base the products in the near future targeted to abrasion or scratch resistance, and UV protection for solvent based coatage. This will locate ten Nanophase based products for various market applications with several more plan to follow.

As you may recall, ALTANA Chemie loaned Nanophase $1.6 million to purchase an installed dedicated production equipment for the expected volume. Implementation is on plan, and equipment should be operational by the May/June time frame to support an anticipated material scale up and order rate during the second half. ALTANA Chemie continues to move forward, penetrating markets and creating nanomaterial based additives for coatings and plastics. We continue to anticipate, based on their current forecast, significant revenue growth during 2006.

Rohm & Haas electronic materials CMP technologies is making significant strides gaining business in chemical and mechanical polishing for semiconductors. I provided considerable details on this activity during our March 9th conference call and I would refer you to those comments. The scaling by semiconductor manufacturers continues vigorously and we are highly optimistic about business and revenue growth going forward. Alpha Azar, our new market partner added late in 2005 is scaling and now delivering 21 Nanophase brand nanomaterial products to research and development communities globally. In the near future, they plan to make a mass marketing push with a specific brochure dedicated to Nanophase nanomaterial products. Again we believe this relationship will help the Company reach the global research and development community and help drive future revenue growth as our nanomaterials are incorporated in commercial applications .

Late in the first quarter actually beginning of this quarter we received two new different customers for new applications. The first is for a cleaning product that utilizes nanomaterial to provide residual anti-microbial and UV protection. It is an interesting application in a few field and should grow to be a nice account for the Company.

The second represents several initial orders for an exterior architectural coating and application that we discussed before. This product is scheduled to be hitting the big box store between Memorial Day and June 1st followed by a sequenced national roll out. We are shipping initial orders this quarter which would material to second quarter revenue, and have been told to expect a multiple volume increase in the third quarter. At this point we do not know the exact details of the roll out timing but the full roll out is in the fear future. Based on the volume estimates from our customer, we believe this application will add 1 or 2 million in revenues per year when the roll-out is complete.

As an aside, architectural coating is a focused market for ALTANA Chemie and Nanophase going toward. According to a recent analysis by the group, this is a $39 billion global market that offers many opportunities for nanomaterial based products.

In summary, we remain aggressively optimistic about achieving material revenue growth during 2006. Market partner growth, new customer growth and business development opportunities remain robust. This concludes our prepared remarks and we're available for questions at this time.

[OPERATOR INSTRUCTIONS]. Your first question is from Avinash Kant.

Good afternoon. A few questions. First, starting with we talked about some extraordinary charges and also the FAS 123. Now, could you break out which lines did they go to like 115, 111 million? Where did that go to, which line item, where was that.

They're distributed through the salary lines. They go through cost of goods sold to the extent we had some personnel in there that are salaried R&D and SG&A. The bulk of that would be in SG&A the way we carry our salaries. There is also some of that in R&D and a a lesser extent cost of goods sold. In future calls, I will break out the cost of goods sold particularly. I know that is an important number. I am trying to avoid overwhelming everybody because of tons of numbers. The more complicated this gets, the more the number flow gets.

Why I was thinking in our models if we wanted to compare historical, and it would be maybe good idea to separate these numbers like with or without.

Sure.

I can do it on a final basis but I won't know which line item did it come from. That's why.

The bulk of it, I don't have the numbers in front of me. The bulk is coming out of SG&A and a minimal amount coming out of cost of goods. What I don't have a handle on for this call at this second is what the percentage coming out of R&D relative to SG&A would be.

Okay. And there was some what are the 200 K that went into? One-time charge?

The 195,000 was the equity comp. The 111,000 was the patent write down, and about 300,000 in depreciation. The 200 is the same thing you're talking about in terms of equity comp. 115 was the options specifically and the other 85 was split between Director compensation now had a stock component. That's all in G&A by the way, and we have had restricted and performance shares. However, the balance of last year's total in Q1 was only 11,000 and this year it is up quite a bit, and that has a lot to do with the stock price increasing in Q1. It is a retro active calculation you have to do under APB 25.

And that's another problem I would expect that could you give much guidance in terms of how much the impact of stock based compensation in the coming quarters?

There is not a good way to know. That is a excuse me active effect based on the performance of the stock. Some of it is relatively fixed. Let us think of how we'll do that. We need to share equally with everybody, and we need to determine how best to do that. We're wanted quite prepared today t to do that.

Okay. In terms of the customers you did talk about architecture coating opportunity. You said you do expect to start shipping in Q2, right?

We have already shipped and are shipping as we speak.

This will be part of the revenues in Q2 and then the ramp would come in Q3?

The ramp is started now. The revenue for this new application will be material in Q2, and we don't have Q3 tied down. We spent all day with the customer actually yesterday, and they're putting their schedule together, but we're expecting multiple times the value in Q3 as we're shipping in Q2. Q2 is what I would consider significant for us.

The one thing I wanted to understand is that this estimate put out a press release not long ago about the kitchen and bath product, but my understanding was you have been shipping your material to them for the kitchen and bath product for quite some time now.

That's true.

You understand which I am talking about, there was one within a month.

It was April 6th they put out a press release on the kitchen and bath product. The current product that we're talking about will also be under the nanoguard label. It is a little different looking label than the current label. It features nanoguard more prominently, I have been told. I have not seen it, but that's what I have been told by the customer. That will be in stores as I said between Memorial Day and June the first, and then it is going to continue the roll out. The way this is scheduled, there is 2,000 locations, and there is a sequenced roll out. Region by region, district by district.

And are you going to be giving the revenues from key customers and key partners like ALTANA, BASF, Rohm and Haas.

We have to do that on the Q. As we file SEC reporting of course we will.

BASF you did say, though, did you have revenue from the second BASF product in the current quarter?

A small amount, a small amount. That's still going through market introduction. We don't expect significant revenue from that until the second half. BASF was just here last week, and we went through all of this again, and it looks pretty much like a build in a second half.

So just to understand the timing of it, you said by the end of this year you will have four products from BASF, but how many of them would be generating revenue for you?

The initial product is scheduled above last year's rate right now through the remainder of the year. The ZCote Max product we expect to scale up in the second half. I don't have total visibility on that so I can't quantify that for you. The two new products, one looks like it is going to be released September roughly, maybe August. We'll have initial revenue in that time frame from that product.

The second product closely following that we've been told. We don't have an exact date on that, but somewhere around there, and we'll have initial revenues on that product. As far as the ramp goes, the ramp for the two newest products will more so in 2007 than 2006.

Okay. And finally, what was the head count at the end of the quarter?

Around 55. I don't know the number as of this second.

Thank you so much.

Thank you. Your next question comes from John Roy.

Hi, Joe, hey, Jess. Real quick questions. Burn rate for the quarter, can you give us an idea and when do you see not when but exactly what kind of revenue run rate do you see as break even? Obviously the ramp revenue the gross margins are going to continue to rise but we don't know exactly how much.

Sure. It is dependent on product mix. The burn rate for the quarter is going to be lower than average, but there are some anomalies. We're doing a lot of building. We've had in terms of working capital, there has been a the way it is structured at the end of Q1, our operating burn rate is going to be in the 600,000, 6 to 700 range.

I don't know that we'll repeat that next quarter. A lot of that has to do with the capital projects and other things. We still think that are run rate is somewhere in that 13 to $15 million range. We still got an internal target of getting to that run rate by the end of the year, whether we actually do it in Q4 or Q1 is dependent on several things internally we just want to get there.

Right. Okay. Thanks, guys.

Thank you

Thank you. Your next question is from [Andrew Boswell].

Good afternoon, Joe and Jess. How are you?

Good. How are you doing?

Good, thanks. My only question. Joe, towards the end of your discussions you were mentioning a couple of recent orders, the architectural coating relationship I am pretty clear on the other you discussed, I believe was a cleaning product?

Yes. I can't discuss the application in great detail without incurring customer wrath, okay, so it is a cleaning product. It is used for synthetic fabrics, and it leaves a residual anti-microbial effect which they have found significant in their testing as well as residual UV protection which they believe is significant in their testing, and this is eventually through our customer is a consumer product, and that's really about all I can honestly tell you, Andrew.

Okay. Primarily I was trying to ascertain just line these up sort of with the actual announcement with the press releases and I was trying to confirm that this is not the same order as the April 6th press release on a UV anti-microbial for the transportation of marine. I guess it is.

It is. It is the same discussion.

Okay. I hadn't associated that. I was thinking of a coating, I suppose for a more rigid substrate as opposed to a fabric. This makes sense now.

Okay.

That's all. Thanks.

Thank you. [OPERATOR INSTRUCTIONS] There are no further questions at this time.

Thank you for your time and attention today. We will talk to you again at the end of the next quarter. We expect to be pretty exciting. Thank you very much.

Thank you for joining today's conference call. You may now disconnect.