Solesence Inc (SLSN) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to today's program. (Operator Instructions.) Before we begin, I would like to take a moment to 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 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 and Exchange Commission.

Nanophase undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.

I will be standing by, if you should need any assistance. It is now my pleasure to turn the conference over to Mr. Jess Jankowski.

Good afternoon. We appreciate your participation in today's third quarter update. The financial statements disseminated today validate that our business strategy, including our new sales and marketing models, is beginning to generate positive results. Your Management Team and Board of Directors are confident that we're heading in the right direction for Nanophase and its shareholders. Expectations are high. It can be challenging to discuss the progress we're making without providing our competition with useful information. But I did want to share with you in general terms the progress we've made over the past several months. We're optimistic that you'll share our excitement about the potential of your Company.

Before we go on to an overview of our progress, I'd like to turn the conference call over to our new CFO, Frank Cesario, to briefly review the financials for the third quarter.

Thanks, Jess. Good afternoon. This is Frank Cesario and this is my first opportunity to speak with you since joining the Company in June. I'm excited about being part of this dynamic new Management Team and hope our shareholders will share in my excitement as we continue to focus our business strategy and the milestones established by the Management Team and by the Board. As I provide an overview of the financial results of the third quarter, remember they are always stated in approximate terms. Revenue for the third quarter was $1.7 million; revenue for the first quarter was $1.4 million; and for the second quarter was $1.6 million. While we've enjoyed sequential incremental growth as 19--as 2009 has unfolded, the marketplace remains very tight with our customers squeezing their inventories very aggressively. Based on this dynamic, our fourth quarter expectation is for more of the same with baseline expectations around 1.2 million.

As a percent of total revenue, gross margin for the quarter was 27%, an increase of 93% over the comparable 2008 third quarter gross margin. On a consecutive basis, gross margin improved significantly. Gross margin was 6% in the first quarter, increasing to 11% in the second quarter, and again, was 27% in the third quarter.

Third quarter revenue was off on a year-to-year basis by $300,000, but gross profit increased by $200,000 over those same two periods. This is a result of our lean business strategy, which has reduced fixed manufacturing costs while providing a manufacturing structure that is now sufficient to support significantly higher levels of production without an increase in fixed costs, as a matter of fact, with a decrease in fixed costs.

The net loss for the third quarter was $875,000, or $0.04 a share, a significant improvement when compared to the net loss, including severance charges of $1.6 million, of $2.8 million, or $0.13 a share for the third quarter of 2008. And I'll note that the net result even backing out that severance charge is a $300,000 improvement year-to-year, despite a $300,000 decrease in revenue. Running leaner has had a considerable impact on our bottom line.

Our balance sheet remains strong. We finished the quarter at $3 million in cash and equivalents and an additional $5.3 million net in long term investments. We paid off $1.6 million of debt during 2009 with a final $500,000 payment made in July of 2009. We are now debt free. I think a lot of people like to say that. Finally, I understand that we have had discussions here and in our securities filings regarding the $6 million of gross value of auction rate securities that we weren't able to sell due to a freezing of that credit market. We've been looking to sell them as close to the par value as possible, and during October I'm happy to say we were able to sell one of those three bonds at more than $1.7 million in net proceeds. That cash will be reflected in our year-end balance sheet and is not included in the $3 million I stated earlier, though it was included in our longer term assets.

I will now turn the call back to Jess Jankowski.

Thanks, Frank. In light of the overall economic conditions, I am pleased that we've been able to significantly improve our gross margins and reduce our cash burn. And as of July 2009, we are debt free with a strong balance sheet. We are now seeing the effects of the extensive measures we implemented to adjust overhead, reduce costs, and add product and market diversity through the addition of new sales and marketing strategies.

Over the last nine months, we've seen our partners aggressively managing their inventories as revenues have declined considerably. This has resulted in a decrease in the frequency and quantity of orders to their supporting vendor groups, including Nanophase. We're working closely with our partners, but it's difficult to project their recovery cycle timeline. On the other hand, we're beginning to see incremental growth and signs of recovery with potential new customers.

We have also reached the point with several customers where we have seen them launch new products incorporating our materials that have not yet been embraced by their markets. It's too soon to tell whether these will grow in 2010 or not. Some of our efforts are around higher end products, which may get better traction after an economic rebound, but have yet to show us the growth we expected. Transforming a company's business strategy is always difficult and even more so when the economy is so unpredictable, and I believe our stock price reflects that unpredictability. Sometimes you have to take a few steps back in order to move forward and reposition for growth.

I'd like to remind our shareholders that we have made tremendous progress in the last several months, progress that will position the Company for a sustainable level of commercialization. We are now operating a lean, nimble organization that's focused on growth and creating value for its shareholders. We have reduced risk by migrating from a partner driven, volume manufacturing model toward including an aggressive customer direct focus. We are building a robust prospective customer pipeline in a difficult environment. Opportunities are working their way through it and we are excited by the feedback we're receiving. We're developing products that can be integrated quickly into customer solutions and we are targeting markets that will benefit most from our products to more rapidly build sustainable revenue.

While all of this takes time, it will make Nanophase stronger and more self reliant. We're running your company with much more of an entrepreneurial focus than ever before. The speed at which we continue to make progress will be affected by both the economic climate and the rate of our migration from a totally partner driven volume manufacturing model to one that is dominated by a more aggressive customer direct component. We've worked with our partners for many years and we'll continue to strengthen those relationships. Overall, their markets have stabilized at a lower level, but the personal care markets are still robust and the housing market is beginning to show signs of life, which will in turn require paints and coatings for remodeling, renovations, and we all hope, new housing starts.

We've positioned Nanophase for the rebound of these markets and we continue to aggressively pursue other multiple market opportunities. Our business strategy, leaner operations, and new market opportunities are helping us to become a more successful company. Our investment of time, energy, and money in applications development and customer outreach has positioned us to capitalize on those opportunities that are available now and those opportunities that will continue to expand as the economy improves.

Elise, would you please begin the Q&A session?

Certainly. (Operator Instructions.) Our first question comes from Michael Lew with ThinkEquity. Please go ahead, sir.

Hi, Jess.

Hey, Mike. How are you doing?

Good. How about yourself?

All right.

I just had a couple of questions. Can you talk a little bit more about the--your partners? Like, which of the major customers or business lines grow the incremental revenue growth?

The real period over period--I mean--.

--Was it BSF, Rohm and Haas?

BSF held up well. Rohm and Haas, as we've said, has really fallen down. We haven't had revenue from Rohm and Haas this year really. That's a--the CMP business has just been struggling and the part that they're in has been struggling more. They're an excellent partner. We changed our relationship with them this past year to go through and become non-exclusive. But--so they're a partner in the sense that we still work together regularly. They're not an exclusive partner anymore, but we haven't seen that--growth from there at all. That's been a reduction.

Okay.

The architectural coatings business, the customer--we don't disclose the large customer--has been down over the period. I mean, it's really been the personal care and sunscreens market that's been going and a lot of smaller, newer applications coming in, and then some existing applications that we've had in the past. I mean, we haven't--I am far from happy with the growth relative to the total revenue volume, but I am happy that we've seen some incremental growth, and of course, we're disappointed to see that Q4 is going to be down a little bit.

I know it's still pretty tough out there, as you indicated. But can you give us a sense of where your business is? Do you believe, like, you're beyond the trough? And how many more additional quarters do you see, like, destocking going on or inventory management going---ongoing?

It's hard to tell. I had really hoped that by the middle of the year that would be over, and that's not the case from reaching out and talking to people and also reading about what other people are doing. As far as whether we've hit the trough or not, I can't say that either. I would say that I don't expect business to continue to go down. I think the personal care market is a solid market. I think the coatings market, the exterior coatings, are going to be growing. Fourth quarter is generally not a great quarter for us, so it's hard to determine. But everybody is reticent and they are keeping inventories tight. I mean, you would assume when that attitude changes that there would probably be a bump filling the lines up again, but that's hard to determine.

And can you also talk about--you mentioned before the new sales and marketing model?

Well, what we're doing--if you looked at it before - and I know that we've talked about this in certain different pieces quite a bit - but we essentially were driven primarily by a market--by a partner approach. So we'd had several partners and we were reliant upon them to go after all the business we had and we didn't have--we had no interface with the customer. And not only did we not have interface with the customer, but we couldn't actually pick targeted markets if the partner wasn't particularly interested in doing that. And what's a lot of money for Nanophase isn't always a lot of money for some of our larger partners. So we decided that while we value the partner business and we continue to support it, being in front of the customer directly is really the way for this business to grow.

So what we've done is we've established a series of markets. If you go to our website, we've got eight markets right now and we're focused to varied degrees on those eight markets. But essentially, we've gone from say having less than 100 opportunities in the pipeline in about 14 markets to working on almost several hundred opportunities in say six or seven markets. I imagine by the time we get to this time next year or summer of next year it will be more opportunities in even fewer with more focus. Now, when I saw market, each market has multiple applications, so it's not as if we have an exterior coating product for clear deck stains that we think is an excellent product. We've got a small company out there that's doing okay with it. We're looking for next year to be a good year for them, but don't know yet.

That's an application in the coatings market. I mean, we're not going to abandon all of that. We're just focusing a little tighter. And I think that's something that we didn't have the ability to do. And the value of Nanophase today, and this is a little different than probably in the past, we were essentially a platform company. And a lot of nano companies did the same thing. They said, okay, we'll partner with somebody that does this version. Well, Nanophase, we don't want to do that. We learn how to make dispersions ourselves. We'll partner with somebody that coats materials. We know how to coat material as well. So now, we've got this suite of three different things we can do and under the partner model you're almost to a certain extent waiting for people to beat a path to your door and we need to get out there and market directly, and that's what we've been doing with this direct selling approach. And it's effective, it's just the time to market.

Nanos are very, very high end materials, but most of our customers are specialty chemical companies of some sort or another and that time to market is long. And that's what we're struggling through right now as we see the base load of the business shrinking. Due to the economy, we're putting new opportunities in a pipeline and they're working their way through.

Thank you very much, Jess.

Thank you.

Thank you. Our next question comes from [Peter Carrillo] with Avalon Partners. Please go ahead.

Yes. Good afternoon, gentlemen. Actually, you basically touched on what I'm going to ask you in your answer to your second--to the second question. You basically said that you were a platform technology company and that's basically the way I viewed you. I'm just wondering, what are the benefits of changing direction or strategy here in a real tough economic environment?

Well, there's benefits and there's disadvantages as well. The disadvantages obviously, we turned the Company upside down and we made a lot of changes. It also allowed us to reevaluate this and what we're anticipating is as the economy turns and gets better, innovation is one of those things that a lot of people don't think about as much while they're struggling and trying to keep the lights on. But if you want to get market share, it's a way to do it. We realize that for us to be at the front of the spear, basically in front of the customer, we had to change the way we were doing that. And we've also realized we were at a point where we assumed being a platform company that we'd make something better and people would come and get it and it might cost more, but it will work better.

Well, we're at a point now where we're adept enough on the applications development side to develop things that cost about the same or the system cost is the same, and you get better performance. And that's been a change we've begun working on making that would have been difficult to make under the other paradigm, because we weren't getting that--kind of that voice of the customer is the term people throw around, but that direct feedback being across the table. And I think the benefits of doing it in a down market--the disadvantages, again, are having to make these rapid changes while we're not having the base business stay flat and continue to feed us in terms of cash flow. The advantages are I think people are going to be a lot more nimble and I think as time goes on there's going to be a lot more activity regarding getting new materials and getting additional performance. And we're seeing a little bit of that now and I think we're going to see more of that next year.

Just one--a last question here. How's your cash position? And basically, are you going to be looking to--are you looking to raise new capital in the future?

This is Frank. Let me take that one. We finished the quarter at $3 million in cash and another call it $6 million of gross value of auction rate securities. But net of our impairment charge, it's 5.3 million. So it's still a fair amount of cash for our company. Now that our debt is gone, now that we're done paying for restructuring charges or virtually all of them, our cash need has certainly gone down quite a bit. So at this moment, I can tell you that I'm not pursuing anything aggressively. However, I'll always tell you that we're always keeping an eye out on the marketplace and we're always looking to see what makes sense for the Company, what the needs are going to be a year or two down the road, and start planning in advance. So we don't have any specific plans today, but I'll always keep my eye open.

So what you're basically saying is that your burn rate is significantly low?

Significantly reduced. And just using the third quarter numbers as a comparison, revenue was down 300,000. But the net result is more than $300,000 better than the third quarter of 2008. I think that says quite a bit about the change in the structure.

Okay, thank you.

The struggle here has been the variability in revenue. And everybody--when we get--hopefully, as we get to our next quarter's call we'll have an idea of 2010, but the variability is high and that really is the flyer here. I didn't think walking into this year that our revenue would be down to this extent certainly, and certainly even in the last conference call I didn't think it was going to happen. And it makes it difficult to determine the answer to your question, but I think Frank answered it accurately. We're in solid shape right now. We're always thinking about what happens a few years down the line, and we're doing a lot of--we try to keep alert to the scenarios and what could happen just so that we're not caught flatfooted. But right now, we're in good shape.

Okay, thank you.

Thank you.

Thank you. (Operator Instructions.) Our next question comes from Alex Wahba with First Allied. Please go ahead.

Hi. Hey, guys. That's a very good job on this quarter. Just wanted to ask a quick question--two questions, actually. Any new markets that you're going to pursue next year? And following up on Peter's last question, when you compare the cash of last year at this time compared to what you have right now, if you were to pursue other markets, do you think your cash burn will--what is it and will it increase at all?

Currently, we're probably going to pursue fewer markets more aggressively and that's a function of as we build our pipeline and we get to the point where we have hundreds of opportunities, part of it is making our understanding of each opportunity deeper so that the ones that go in there--when you're dealing, in our case, where you've got a time to market that in some cases can be three years or more, you want to make sure that you don't start on a project that you didn't understand that well and 18 months into it, it falls apart. So we're probably going to narrow our focus that basically we've got eight markets we're in. We're not going to turn away revenue for existing customers.

But in terms of where we apply our development effort, it will probably be fewer markets. It shouldn't take any additional cash to do that. We're not going to do anything though to remove any of the support for the marketing and sales group at this point. I mean, it's critical to the Company. As far as I'm concerned, you've got people rowing and they're pulling and that's what we need. And what I'm really looking for is proof of the model and some growth, so that we can actually build on that. And I'm not--I'm optimistic, but realistic and I'm realistic enough to know that we're not going to do that until we've proven that we can do this. But I think we can and I'm just high on the prospects of the way we're going to market and the fact that this in the long term is going to work out for our shareholders and for this company.

Thank you.

Thank you.

(Operator Instructions.) It looks like we have a follow up from Michael Lew with ThinkEquity. Please go ahead.

Just one other question I had. What was the revenue contribution by major customers? Like, how much did the unnamed coatings account for and the sunscreen segment account for?

In Q3, our--BSF was about 1.1 million of the quarter.

Okay.

So they were the lion's share of that total. And the unnamed large architectural coatings customer had some volume. By definition they may not be a significant customer. They'll be barely a significant customer this quarter. And over a period of time that's not going to be what it was. For this year, I don't know what the total year is going to be, but it was--it had been a big account in the past. They are an innovative company though and we are working on several projects with them. I was just there three weeks ago. So we continue our relationships there. And ultimately, some of this is driven by innovation, some of this is driven by the housing market. But I do think we've got a good--I was going to say the word "platform." I hate to even use that word, because the context that I would use platform on is the platform of growth, but we are no longer a platform company. We're an applications company. And that's really where the money is and that's where the value is.

All right. Okay, thank you.

Thank you.

(Operator Instructions.) It appears we have no further questions at this time. I'll turn it back to you, Mr. Jankowski, for any closing remarks.

Sure. Well, our level of enthusiasm and commitment to our shareholders and the Company's future couldn't be stronger. All of us are aligned with our strategic direction to build shareholder value and a strong, viable company, and they go hand in hand. I appreciate your time today and I'm always available for any follow up questions you may have. Thank you.

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