Solesence Inc (SLSN) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to today's program. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. (OPERATOR INSTRUCTIONS). Please note, this call may be recorded.

I will now read the Company's Safe Harbor statement. The words expect, 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 a customer to cancel a purchase order or a 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 and Exchange Commission. Nanophase undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.

It is now my pleasure to turn the conference over to Mr. Jess Jankowski, President and CEO of Nanophase Technologies. Please go ahead, sir.

Thank you. Good afternoon and thank you all for your ongoing support of Nanophase. There continue to be many positive changes as well as some challenges at our Company since we last talked. In this call I will cover fourth-quarter and full-year results, but more importantly I will continue to discuss forward progress in the ways that Nanophase has become a stronger company over the past few quarters.

This is the first time we have had our annual call after we've filed the 10-K. There's quite a bit of financial detail in that document, so I'll cover most financial information in brief. I've had an aggressive travel schedule this year so far, along with the challenging year-end audit due to some specific changes to the way we report things in our financials that have extended the typical audit time frame.

We also wanted to be able to discuss some customer issues that would have been off the table for this call, had agreement not been reached in the last few days. We expect to be on a tighter schedule going forward.

Let me cover the financials in brief, which will, as always, be stated in approximate terms. Revenue for the fourth quarter was $2.1 million and in line with management's expectations. Revenue for the fourth quarter of 2007 was $2.6 million. The net loss for the quarter was $1.9 million or $0.09 per share compared to a net loss of $1.3 million or $0.06 per share for the fourth quarter of 2007. I'll go into more detail as we discuss the full-year numbers for sake of better comparability.

Revenue for the year was $10.2 million compared to revenue of $12.2 million for the same period in 2007. As a percentage of total revenue gross margin remained at roughly 26% for both years. We were encouraged that, although revenue volume was down and 2008 was a difficult year, even though the dollar margin was down we were able to maintain this margin percentage. This was largely a function of a better revenue mix in 2008 than in 2007 and reductions in surcharges for raw materials pricing in 2008 that resulted in reduced revenue while allowing for a greater recovery of our cost of production.

Net loss for the year was $6.4 million or $0.30 per share, while the net loss for 2007 was $3.7 million or $0.19 per share. 25% of the 2008 loss, $1.6 million, was attributed to severance charges. Another 10% of this loss reflected an impairment charge related to our auction rate securities.

Although we don't feel we need to liquidate these securities to fund operations, given their current illiquidity in the current economic climate, we were required to seek evaluation opinion using a discounted cash flow model that indicated their value was impaired by 11%. This resulted in a $660,000 charge to reflect that impairment.

In total, this charge and the severance amounted to $0.11 per share of the $0.30 per share loss for 2008. Additionally, the Company has decided to change our method of accounting for patent costs. We will now expense patent costs as incurred instead of capitalizing them. We made this retroactive change in Q4 and showed the accounting impact in detail on the 10-K. The Company believes that it no longer has the ability to reasonably predict whether a patent will be granted, when it will be granted or whether all claims will ultimately be upheld.

Given that, we believe that it's preferable to express all patent costs when incurred as period costs. This amounted to an increase of $41,000 to our 2008 net loss and an increase of $133,000 to our 2007 net loss. This change will allow for greater transparency and more consistent quarterly comparability. As an aside, this is really more of an accounting issue than a statement on our technology.

We continue to build intellectual property value all the time. Some will result in the pursuit of patent protection, while much will serve to continue to enhance our competitive advantage. Given the unpredictability of the US PTO and foreign patent offices, this new treatment will help to make our financials more clear.

Regarding operating expenses and cash flows, as we go forward the senior management changes in 2008 will eventually result in annualized savings of cash salary expenses of about $750,000, the bulk of which will begin to be seen in Q3 of 2009. In addition to the recent resignations of two executive officers in February, we have taken further measures so far in 2009 to reduce both operating expenses and, more importantly, cash used in operations. We eliminated 12 additional positions that became redundant due in part to the economy and in part to the Company's shift in business strategy, which I will discuss a bit later.

We expect these new 2009 measures to reduce operating expenses by an additional $1 million in 2009 and $1.2 million in 2010. Of course, we believe that these staffing changes will not limit our ability to execute our business plan for 2010.

All told, we expect that 2008 and 2009 changes in senior management and reductions of other staffing to result in the annualized reduction in operating expenses of approximately $2 million or $500,000 per quarter beginning in Q2 of 2009. In terms of cash impact, for 2009 this should result in a reduction of cash used of approximately $1 million, growing to a cash savings of $2 million in 2010 as the last of the severance obligations are satisfied.

The changes we made reflect both the economy and our migration from a partner-driven volume manufacturing model to a customer-direct model. Let me break down the revenue outlook for 2009, and then I will expand upon this further.

Revenue from BASF amounted to $4.9 million or 48% of our 2008 business and was down $1 million from 2007 due to reduced volume and reduced pricing. The pricing reduction was directly related to lower commodity raw materials inputs. We expect BASF volume to be down approximately 10% in 2009 due to softness in the consumer products markets. Long-term, the sunscreen and personal care market should continue to grow, but probably at a single-digit pace.

Revenue from our largest architectural coatings customer amounted to $2.5 million or 24% of our business in 2008 and was down $600,000 due to the impact of the economy on the housing and home improvement markets in general. We expect continued softness here in 2009 with potential significant reductions in this volume until the economy and housing improves.

In the longer term we believe exterior coatings will remain a vital part of our business. I will discuss this key market further in a few minutes.

Revenue from our largest polishing customer amounted to $1.2 million, almost 12% of our business in 2008, a $400,000 increase from 2007. Given the battering the semiconductor markets have been taking and the fact that, due to the sudden drop in demand from their customer base, we now understand our CMP customer accumulated significant inventory in 2008. We expect minimal volume from this customer for the first half of 2009. It's too early to tell what the second half will bring.

An important and positive development here is that we have changed our contractual relationship so we are no longer mutually exclusive with this customer. We are free to explore other CMP market opportunities as part of our customer-direct model. As I alluded to earlier, there is more detail on this in our 10-K.

Our sales to BYK Chemie were down significantly from 2007 as they continue to work off inventory. They've had a few successes in coatings applications with our materials, but we don't expect these to accumulate to seven-figure total revenue for 2009. With limited ability to predict how current economic conditions may impact our strategic market along with the 18- to 36-month times to market that we typical experience, we continue to take a conservative approach to 2009 and, in line with previous guidance, expect revenue to be approximately 25% lower than in 2008. This reduction is due largely to sales projections from our existing partners and customers. Clearly, for 2009, housing and the semiconductor markets will have an outsized impact on our top line. This outsized impact really reinforces the importance of our new strategy to shift from a strictly partner-driven model to a direct selling mobile where, while still supporting our partners, we emphasize the development of a greater diversity of customers and markets and, as we will discuss, we are aggressively pursuing market opportunities.

However, because it's taking time to implement our new strategy and because of the economy, we expect the first quarter of 2009 to be our softest quarter. We believe total revenues will be down by more than 50% from Q1 of 2008, putting them in the low $1 million range. Looking to late 2009, we're prepared for a rebound in sales when the economy strengthens and when we get toward the end of the year to possibly see an even greater influence from our more aggressive marketing programs as our ready-to-go products and innovative applications attract new customers from a variety of industries, both through direct selling and in support of our partners.

Moving back to cash, we exited this past year with $13 million in cash and investments after using about $3 million in 2008. For 2009 we expect to use more than that due to our loan from BYK coming due and cash severance payouts for former senior executives and, to a lesser extent, the 12 employees whose jobs were eliminated in February.

That said, we have enough cash to take us safely through 2009 and to position us for a stronger 2010. Although we have taken steps to operate as practically and efficiently as possible, we are not playing defense; we're looking to the future. Our new way of going to market will make Nanophase a fundamentally different and more successful company.

I've spoken about our new approach to selling several times, but I think it bears repeating. First, within the last 12 months, we have refocused our research and development efforts so that they are aligned with the market-driven, customer-direct model. We have become intent upon building applications expertise. We are taking this approach instead of stopping at the new product development stage and then relying upon our market partners to sell those products. As a product of this new model, we are working to carefully select a relatively small number of markets which we can understand intimately, talking to customers and potential customers in those areas and then tailoring our product offerings towards true unmet needs where there is a strong value proposition.

We believe that this approach will result in a higher number of quality opportunities up front and a faster rate at which we can move those qualified opportunities through our sales cycle to revenue. While many of the factors related to how quickly a prospect becomes a customer are still outside of our control, this new approach essentially helps to ensure that the customer receives the best Nanophase product for their particular system the first time. This is where we believe we have developed ready-to-go products which will certainly serve the customers' needs much more directly than we were able to in the past.

Remember, in most cases we are not selling a product, at least at first. We are introducing a brand new technology and offering new capabilities and solutions. So, with our focus on, one, understanding the unmet applications needs up front and, two, understanding the application attributes of our nano materials products, then guiding the customer to match the two up, we believe the prospects for success will be dramatically improved relative to the previous model.

What this means is that, as we work directly with customers, typically chemical companies, we now add value to the customer and the customers' customer and are not just selling our product. This really amounts to us taking a more pragmatic approach to R&D. Applications development is where we are making our investments. This is a key difference that will open many more doors for Nanophase. We believe that these odds are much better.

Secondly, while we support products to be sold in various markets through our partners, we have reached a level of applications development and market expertise in one broad market, exterior coatings, which includes paints, stains and industrial coatings that in many cases has given us a knowledge level that exceeds that of our customers. This is another Nanophase first. This work has helped to position Nanophase as a value-added solution provider that not only brings unique advanced nano materials to the party but also brings knowledge of their application that is often missing. We understand both what the market needs are and what the performance requirements of the materials are. While this won't shorten time to market as much as we'd like, it will increase our hit rate.

I continue to recognize that our job is to build the enterprise value of Nanophase. We do that best by taking the time to understand the markets and applications first, then to approach qualified customers and partners where we know the likelihood of success is highest. This is where our value will come from. It's the applications knowledge that will drive our growth and our value.

When I began in this role in August, outside of our partners in the personal care and CMP markets, we had almost 90 opportunities in 14 markets that we were trying to understand and service. This was simply too many markets to pursue effectively. As part of our extensive strategy work, we have narrowed our potential top markets down to six, and we will continue to dig deeper. As with the exterior coatings market, our goal is to understand several key markets in-depth and focus most of our resources there.

We are utilizing an extensive process to analyze these markets, including size of opportunity, availability to Nanophase's technology and price sensitivities. Once we are through evaluating these six targeted markets, unless they are all home runs, we will adopt the ones that serve us best and keep working the process.

Please be clear. Over time, we could significantly grow our business just around exterior coatings, but I recognize that one market plus growth from our partner-driven businesses may not yield a steep enough growth curve for this business. If we end up focusing on even three solid markets in addition to supporting our partner-driven growth, we will have a steady pipeline of opportunities that will see a higher degree of commercialization and lead to a bigger, stronger company.

While you might think that fewer markets would mean fewer opportunities, the opposite is true. Our new focus has led to more business with more customers and more, better vetted opportunities than ever before. We continue to refine this focus to our best advantage.

Due to our near-exclusive reliance on partners, Nanophase hadn't had to go through this level of market and applications analysis before. Although some of our market partners have been quite successful in certain areas, we need to have a direct customer interface to really move things along. We will always remain open to new opportunities in other markets, but if they're outside our top markets, whether that's three or more, the level of wholesale organizational focus -- and this is from marketing, applications R&D, sales, engineering, manufacturing and finance -- must be reduced to avoid scattering resources. We need to focus the bulk of our people and money on our top markets and in supporting our market partners.

To reiterate, we believe that there are enough opportunities available to Nanophase in markets we're already involved with to generate a multiple of current revenue through new applications. This realization was the rationale behind our migration from an engineering and manufacturing-centric company to a marketing and sales company. The opportunities are now there; we need to identify them and go get them.

At a high level, as CEO I recognize that I must be the face of Nanophase in every regard. I'm also the Company's top advocate. I continue to be actively involved in customer meetings and opportunities. Currently, and the timing of this call is a byproduct of this, I'm also working on my replacement as CFO. We are actively identifying candidates for that position to allow me to concentrate all of my efforts on leading the Company in its new direction.

Be assured, my primary daily focus is doing what needs to be done to build the enterprise value of Nanophase as effectively as possible. I know that our valuation will follow our results, and I am focused on results. As I said in our news release, we're both realistic and optimistic about the current and long-term prospects for Nanophase. We have made many hard choices that we are confident will bear fruit in the near-term.

We're close to completing the formation of our new leadership team and are putting the final pieces in place to leverage our capabilities for maximum growth. 2009 will be a critical year. We have a new management team, a new sales strategy, a new, ready-to-go product approach, new strategic markets, new applications and a solid balance sheet. Difficult decisions have been involved all along the way. The elimination of jobs and resignations in February amounted to a reduction in the Nanophase employee base of 25%. Additionally, the structural changes we made earlier were necessary steps toward helping us to get the entire organization aligned with a shared set of goals and values.

The level of enthusiasm and commitment to the future at Nanophase continues to remain high. We have a highly motivated sales force that is here to be part of something big. Our R&D group is thrilled with the change in direction, and our entire Company is aligned with our strategic vision. We as Nanophase management and employees are aligned with you, our shareholders, in the goal of doing everything we can to build the value of Nanophase for the long-term. As you can see, this is a different company with a different approach, and we are optimistic about the future.

I appreciate your time today, and I am available for any questions that you might have.

(OPERATOR INSTRUCTIONS) [Nicholas Piet], private investor.

I have been a shareholder since the beginning, I guess, and we started with a direct sales force to the prospects, and we were not able to get at the decision-makers. We were several layers down in the organization, and -- the person we were able to deal with and get to. And so, as a result, we went to distributors who had access to the top guys, the decision-makers.

Now we have gone back to the original approach. How is it going to be different this time?

Well, there's a couple of pieces. You're right; that is what we started doing, and it didn't work at the time. Part of it was that we weren't ready with technology and products that actually worked. So at this point, we have a multitude of materials or powders that we make. We have the ability to change the surface on them or coat them and disburse them in various media. And those three things together we really didn't have when this whole thing started.

Going through partners, which we have done successfully with BASF and with moderate success with Rohm & Haas and BYK -- what that has done is made us realize that it works very well in a situation like BASF. They are a great partner. They own the sunscreen market. They also have protection for the whole market in the United States and a lot of the worldwide market.

For the others, it becomes an iterative sale where you have to take the material, you have to meet the customer, find out what they need. And now we have a group of products and generally the knowledge, particularly in the exterior coatings, to know what will work right away for that customer.

Not only did we not have the market knowledge, we didn't have the technology or the products or the capabilities to even manufacture it, at the very beginning of the story that you laid out there. I agree with you; that was what we did. But the difference now is we've got the materials, we've got the products and we've got a lot of application knowledge.

And now I think our charge is to say, okay, exterior coatings -- I don't know what the number is, but this Company could be doing tens of millions of dollars just in exterior coatings. There are other markets out there, and as we get that level of applications knowledge on those, I think we will really jump start the growth of the Company.

That being said, whether we sell these things through somebody like BASF, who sells to people like P&G and big companies like that, or whether we go direct to a mid-sized coatings company, typically getting something into a market in less than a year is almost impossible, based on the chemical business cycle. And it's more like 18 to 36 months, and that really is dependent on complexity of the sale.

Jim [Lieberman], Wachovia Securities.

Could you comment more about the exterior wood coatings, clear wood coatings products? Because that seems to be a product that the market really needs, and you would think that since there really isn't a great product out there, that that could come to market much faster than the time frames you are talking about, especially since it seems to have been in the development phase for a while. Could you comment on that?

Sure. It depends with whom, Jim. Really, nothing is ever really going to come to market a lot faster from the time that we meet the customer to the time they roll it out. Now, the things that would come to market more quickly would be things we are already in process with. We have a customer who rolled out, on a small-scale -- it's not a small scale; it's a big roll out, but it's a small company -- a clear wood stain. Typically, one of the reasons these things take so long is they want to go through a freeze/thaw cycle, sometimes more than one freeze/thaw cycle.

And so what we're finding and what I think a big change is going to be as we go down the line is that you're not going to see press releases and announcements that we have a new customer, because the new customer isn't going to be $1 million to $2 million in sales, it's going to be $100,000 in sales. And what you will see is we've got a new market. We're starting to roll out. I expect to see several customers in exterior wood treatment this year rolling out, and that entire rollout for those few customers may be $200,000, $400,000. It won't be $1 million. But as we get them, they are additive.

And that's how you get into these markets. I think the big companies -- and we have nothing with them in this regard right now, but just to throw a name -- the people like the Sherwin-Williams of the world can't roll something out in a year. That's a two to three-year process. The original one -- our big architectural coatings customer, we started talking to them, I want to say, in 2005 or a little earlier and I think they hit the market in 2007. And there was no impediment, really. There was no technical impediment at all. A lot of this is what it takes to get it through their organizations.

I do think, though, you are going to see more volume coming through that over time as we get through the year. This is a tough year. The comment I had made about the first quarter being our softest quarter, I mean, it will. Part of that is we are not exactly sure how much is demand reduction and how much is our customers' customers drawing down inventory, because we are seeing that across the board, that everybody's customers are saying, hey, you know what, we are going to work this down to the bone because we don't know what's going to happen. That makes it a little harder to predict.

Regarding the exterior wood coatings -- see, I have a personal interest. I like to use the product. And other people -- it might be worthwhile making periodic announcements about that so that at least people can be aware of what's happening. It might actually help draw some more attention to you. It may actually foster or move the product into the market faster by getting word out there that it's coming to market.

The one that I know that's out there -- I'll see if we can put that on our website or somehow communicate it publicly. What I don't know -- we've created -- I know that it sounds terrible from the investors' perspective. But our customers typically hate when we talk about them. I think this one, because they are smaller, may like to have the publicity. But I don't want to go ahead and do that, not having cleared it with the customer. But you are right; I would love to see our shareholders buying our paint and our coatings.

Companies like -- well, North American [Phillips] used to do that, in the old days. But the other thing is, could you comment on some of the other markets that you're going to be addressing, or can you not even talk about that right now?

Well, if you look at our website, we've got markets we are after and we are launching a new website. The reason I don't want to talk about it right now is, first of all, we haven't seen which ones come to the top; but second of all, they are competitive. And they are competitive both in the sense of nano materials, which is competitive to a certain degree, but competing materials, which is more competitive.

And what I would rather do is be getting into these markets, get some alpha customers out there, get people to know who we are, get them to like our products, like our sales force and understand what we offer and then start talking about it because I just don't want to give a heads-up and have every existing specialty chemical supplier out there cutting prices or poo-pooing Nanophase in the field, which has happened in the past.

But there are markets that you're familiar with. There's nothing particularly that we haven't touched on yet; we're just going to go a lot deeper, and we are going to see which ones. What I don't want to get in the habit of, two things. I don't want to talk about customers and markets that end up being a terminal $100,000 opportunity because neither you or me really -- I mean, I care about a $100,000 customer. But if the whole market is $100,000, then that's just nice little business to have. It doesn't build the Company.

And, secondly, it's just not -- shooting ourselves in the foot, going forward, with disclosing some of this stuff, just because -- it is amazing the beating that I have been taking over the last six months just from one after another. When we put the script on the website and you compare the script from today to our 10-K, it's funny that some of the language used just gets around it. People have asked me to promise not to say their names, et cetera. And from my perspective as, really, top salesman in the Company, if that's what they want, that's what I'm going to do.

Fair enough. I think the focus sounds very good, and clearly the challenge is to get some traction.

I think so. And I think, notwithstanding the economy, by the end of the year we should have some really good things to talk about and the pipeline should be swelling.

One of the things -- I don't have an exact number in my head, but you know that around 90 opportunities -- we have a lot more than that, in less than half the markets, which is telling me that when you understand this story better and what you could provide and what you could offer the customer, they are more apt to talk to you, and it's more apt to be real because they say, hey, these guys get it and they're actually helping me versus having me do a project just to work with them.

And I think we were there a long time, partly because the partner model was such a great idea on the front end. And migrating away from that, it has taken awhile for us to get our medicine and realize, okay, we just have to understand this better. And we are. We've got a great team here. I think -- I don't know if it's the next annual meeting when people are out there or if we take a tour, but our sales group and our R&D applications group is just top-notch. We've always had good manufacturing operations, and that is still going strong. But we just have a wonderful group of people here.

(OPERATOR INSTRUCTIONS) Mr. Jankowski, it appears we have no further questions at this time.

Okay, great. Well, thank you all for your time. I'm looking forward to next quarter, which is closer than it should be, due to the timing of this call. But we'll have more good things to talk about. Again, I and we are very optimistic about the Company, and we are glad you are hanging in there. We will talk to you all soon. Thank you.

This concludes today's teleconference. We appreciate your participation. You may disconnect at any time. Have a great day.