Solesence Inc (SLSN) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience. Welcome to the Nanophase Technology's 2009 year-end and fourth quarter financial results conference.

(Operator Instructions). As a reminder, this conference may be recorded.

The words expect, 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 that 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 would now like to turn the conference over to the CEO and President of Nanophase Technologies Corporation, Mr. Jess Jankowski. Sir, you may begin.

Good afternoon. Thanks to all of you for participating in our fourth quarter and 2009 year-end conference call. We completed the year with respectable revenue, given the climate we are in, and a significantly improved bottom line, during challenging economic conditions, and while adopting a new business direction. Our expectations were high, and we are pleased with the progress we made during the year. We have a cohesive, dedicated management team that is well aligned and goal oriented. We have narrowed our market focus, which has increased our opportunities and success rate. We have incorporated two new business components into our sales and marketing program, Customer Direct, and now end-user product sales. And the Company is lean and debt free, and as you may have seen earlier today, we soon expect to significantly enhance our liquidity. As you may know we began 2010, with the history-making launch of NanoUltra, a family of breakthrough end user products for window cleaning and polishing. But before I discuss our new product line or our 2010 milestones, I would like to turn the conference over to our CFO, Frank Cesario, for a brief review of the financial highlights of 2009. Frank?

Thanks, Jess. Good afternoon, this is Frank Cesario. When I first spoke with you at the end of the third quarter, I shared with you my excitement about being part of the Nanophase team, and the new direction being taken by the Company. I have been with the Company only nine months, and while it may not be as apparent to our shareholders, I could not be more pleased with the progress we have made in product development, sales and marketing, and operations. I am proud to be part of the success that has just begun. Now I would like to take a few minutes to provide an overview of our financials disseminated earlier today. Before I begin, let me remind you that all financial results are stated in approximate terms. For the fourth quarter, we reported revenue of $1.6 million, compared to revenue of $2.1 million for the fourth quarter of 2008.

We have enjoyed sequential incremental revenue growth for the first three quarters of 2009, with revenue of $1.4 million, $1.6 million and $1.7 million. We narrowly missed continuing that trend in the fourth quarter, despite an unfavorable mix of typical seasonality and continued tightness in the market. With that said, we expected revenue for the fourth quarter to be approximately $1.2 million, and beat our expectation by $400,000 or 33%. The net loss for the quarter was $0.7 million or $0.03 a share, versus net loss of $2 million or $0.10 a share for the comparable quarter last year. The 2009 figure includes a recovery of asset impairment of $440,000, due to the legal settlement we announced earlier today. We expect to recognize this $440,000 reversal of impairment charge, on pending sale of our remaining auction-rate securities. More on this in a moment. But without this benefit, the net loss would have been $1.1 million for the quarter.

Our bottom line improved significantly from any perspective, as a result of cost-containment programs and operating efficiencies. Running leaner is great for the bottom line, and has had no negative impact on our revenue growth. For the year ended December 31, 2009, we reported revenue of $6.3 million, compared to $10.2 million for the year end 2008. Net loss for the year was $4.9 million, compared to $6.4 million for the year end 2008. If the bottom lines for 2008 and 2009 were adjusted for severance charges and asset impairment, you would see a comparable bottom line, as we are finished paying restructuring expenses, and going forward, we will enjoy those benefits. Our balance sheet for the year remains strong, as we finished the year at $3.9 million in cash and equivalents, and an additional $3.6 million book value for longer-term investments, due to the auction-rate securities. Those assets, which we expect to be monetized, $4 million with the agreement that we announced.

We paid off $1.6 million of debt during 2009, with the final $0.5 million payment made during July, and we are now debt free. We have had discussions on our conference calls and our SEC filings regarding the $6 million in auction-rate securities, so hopefully this will be the last conference call we have to talk about those. The credit freeze prohibited us from selling the bonds without taking a significant loss. During October, we were able to sell one of the three bonds for more than $1.7 million in net proceeds, cash that was reflected in our year-end balance sheet. Many of you will remember that we filed a FINRA arbitration complaint with Credit Suisse over the auction-rate securities, and that arbitration was scheduled to begin in April. We are pleased to announce that the parties have come to an agreement, in which Credit Suisse will purchase our remaining $4 million in bonds for $4 million. And we agree to drop our claims for the $280,000 loss in the security we sold last October, as well as legal and other claims. Upon final execution, which we expect to occur any day, this matter will be closed, allowing us to focus on more productive endeavors. To elaborate on these more productive endeavors, I would like to turn the call back to Jess Jankowski. Jess?

Thanks, Frank. 2009 was a year of challenges and opportunities on many levels. I'm proud to say that our employees, management team, and Board members met these challenges, grabbed the opportunities, and today your Company is stronger than before, and well positioned to make 2010 a banner year. Your Company has become much more entrepreneurial. We are efficient, flexible, and driven to succeed. The Company's evolution from a supplier of nano materials to selling nano solutions took a giant leap in January with the launch of our NanoUltra family of products, designed exclusively for use on architectural glass. The products were invented by Abby Farning, one of our up and coming R&D chemists. In a span of months, the marketing campaign was developed and led by our Director of Marketing, Kris Weigal, and Glenn Judd, our VP of Operations led the march to manufacturing commercialization. Both of them were helped by lots of capable support, from R&D to finance, and everyone in between.

They pushed the project -- product through the door, through the manufacturing process, and out the door for its launch in an international industry conference at the end of January. Undergirding this effort, Chuck Cucuras, our Director of Sales has been aggressively working to raise awareness and develop sales. First, by building a solid base of alpha customers, and now by showcasing the benefits of our NanoUltra products to a broader audience of large window cleaners and distributors. This entire process represented the execution of an entrepreneurial Company, thinking outside the standard business model. NanoUltra represents a tremendous opportunity for Nanophase. Initially, it targets the professional window-cleaning market, a small portion of the $9 billion consumer dominated US market, which is comprised of both professional glass-cleaning products and services, and consumer window cleaning products. We believe success on the professional side, will provide our best opportunity to expand further into consumer applications.

Although window cleaning and polishing is far from a high-tech industry, we found that it is an industry that is starved for solutions, that allow window cleaners to be innovative, and to differentiate themselves from their competition. Nanophase has built a product for this market, based on a particle that we originally developed for the semiconductor wafer polishing industry. We listened to what the customers wanted, incorporated that market feedback into the NanoUltra product concept, and we delivered. To give you an example of one of the projects we recently worked on, I'll walk you through what has been happening at a resort that has applied NanoUltra products to its windows. This is a project in the Caribbean, where we have been told it can cost these resorts tens of thousands of dollars annually to keep their windows clean. And having glistening windows is critical to their image. They cleaned and polished their windows with our NanoUltra product, which chemically alters the surface of the window glass so that a water spray or rain will actually work to help maintain clean windows.

The product gives the window a hydrophilic quality, so that water actually sheets down the glass, and in the process washes away sand, dirt, and grime, leaving them sparkling clean and streak-free, not just after the cleaning, but over an extended time. Additionally, the application process actually removes unsightly difficult stains or etchings on windows, which can be caused by mineral build-up and the leaching of building materials such as precast concrete and limestone. The issue of image is equally important, whether you are operating a high-end destination resort or a commercial building that represents its tenants success or their aspirations. The product family works, and people are starting to notice. NanoUltra is being sold through a growing network of distributors. Information is available at the NanoUltra website, www.nano-ultra.com. We are pleased with the incremental revenue growth that is just beginning to be generated by these products.

To be clear, NanoUltra is not the only thing we're working on right now, far from it. But it represents something tangible, that we thought you would enjoy hearing about. It is also a great indicator of the adoption of a more entrepreneurial focus on the part of our team. While we are significantly changing various components within our product development and sales and marketing, we are still serving our long-term partner as well. They have our commitment and support, as we continue to strengthen these relationships, by engaging them in the exploration of creative applications with the aim of increasing our partner driven revenue, we continue to work with them hand in hand.

We mentioned in our press release today, that Q1 is shaping up to be a strong quarter, probably exceeding any quarter in 2009. Much of this has been driven by increased demand from our base business with BASF and in polishing. As a matter of fact, everybody is working overtime in the plant, and we were pleased to be able to rehire a few production operators this month to help cope with immediate demand. Things are looking up. Our goal is to have multiple revenue channels from a mix of partners, customers and end users. Notice I said, we're seeking many revenue channels, not many markets.

We still believe that our path to greatest success will be to limit our focus to three or four key markets, so that we can develop a deep understanding of how they work, and how we can best address their needs. The speed of which we continue to make progress will be affected by both the economy and the rate of our migration to an aggressive customer direct model, along with the normal timing of the adoption cycles in the markets and industries we serve. While we are positioning for a rebound in the economy, we're not just waiting for the phone to ring. We're continuing to aggressively pursue multiple opportunities in the coating and architectural glass markets, while targeting products that we think will address needs for the plastics and hard-surfaces markets. We paid the price in revenue growth during 2009 to create a strong, well positioned Company. Our business strategy, leaner operations, and new market opportunities will drive new revenue growth and a stronger bottom line during 2010. Latief, if you would please begin the Q&A session?

Yes, sir.

(Operator Instructions). Thank you. Our first question comes from Michael Lew of NAATBatt.

Hello?

Hey, Michael.

Hi, how are you, Jess?

Okay, how are you?

Good. Good. Hey, Jess, can you elaborate a bit on the NanoUltra product for the architectural glass? Is it ready for commercial usage, or how much qualification testing remains?

We're done with the testing. We're shipping it now.

Okay.

Probably some confusion right have been -- the show in Reno, the IWCA show is the end of January.

Okay.

And it's an annual show, and we made a strategic decision to launch it in January, even though we weren't able to ship the first products until really last week. So it was kind of like, had we missed the January launch, we didn't want to wait a year for another show, or try to find different shows to go out. We went out in January, but started shipping the products on a commercial basis last week.

Okay. Are the marketing efforts targeted primarily in the US or international markets?

Primarily in the US, and given the size of the Company, part of it is labeling issues, part of it is just reach.

Right.

We have got about eight distributors right now. And the goal is to not actually be selling this direct, just having the distributors sell them to various appliers. And even some of the big companies, because I mentioned we're talking to some large window cleaners. They prefer in many regards, to go through distributors as well, just because they drop ship them, they get it to the building, when they want it, where they want it. And we really don't have the setup as a company to be delivering -- these things come in 26-ounce, 32-ounce bottles on a one on one basis. We're shipping case lots from here.

Okay. And you've also alluded to the fact that demand is better than expected, and showing signs of a pickup in general. But how would you rank in terms of the recovery, how -- which of the legacy businesses would you -- how you would rank them in terms of being the most significant driver of growth in 2010 between the polishing, the personal care?

Clearly, it's going to be personal care. And when we get to the -- when we get it all mapped out, and talk about Q1 in the future weeks. The BASF business has had a nice uptick in Q1. They had a weak Q1 last year, and generally, we're expecting that to be a better business, but we're not -- it's difficult to predict. Their lead times, everybody has shaved inventory lead times down to death. And their lead times from their customers are pretty tight. So I don't get too excited about anything, having been through the wars long enough through these kinds of things. But that's -- of the base business that we have, not counting the direct business we're building, that's going to be the largest. But we are seeing also a pickup in the polishing business. And we'll know more probably as we get into Q2, but we had business in Q4, and we expect business in Q1, and probably will get some in Q2 as well.

Those are probably the two biggest, if you want to call them legacy or the partner business. Of course -- I don't know if I have mentioned the Rohm & Haas business at one point -- we are still partners with them, we work with them on a regular basis to develop products, but essentially we had an exclusive relationship until August of 2009. And we both agreed that we would be better served going non-exclusive. So from our perspective, our relationship is just about the same. We're out there selling materials. We both thought we would look around a little bit, and see what's out in the market, and see what's available. So when it comes to the partner model, in terms of directly exclusive relationships, currently that's -- we have BASF. We have BYK Chemie, and then also our catalog business with Alfa Aesar, and our Japanese licensee, C.I. Kasei, Nanotech.

And what is your current headcount, Jess?

About 45.

45, so if demand is --

Next week, it will be 45.

If the expected demand persists, what do you expect headcount to be at year-end? Because you indicated stronger than expected demand for 1Q, and you've had to re-hire.

So far this year, we've hired an additional sales person. We brought on four -- well, two operators, and we have got two operators coming. I would guess at the year-end, we would be somewhere in the 47 to 50 range. Part of it is just a matter of managing demand, and part of it is the scale-up process for -- we're working a lot of overtime right now, and part of that is scaling up for the new product we just launched. I don't think we are going to be accumulating a great deal of headcount. As a matter of fact, we told the people that we brought on, that this potentially could be temporary depending on the flow, but things look pretty good.

Well, thank you.

Thank you. Good to hear your voice.

Good talking to you.

You too, Michael.

Thank you.

(Operator Instructions)

Our next question comes from Jim Lieberman of Wells Fargo Advisors.

Hello. It's nice to see the progress you are making.

Hi, Jim.

Hi, there. About the NanoUltra, so it's ready to go, were there any, like, EPA requirements for a product like this? Or does that not fall into that kind of category.

There are a lot of labeling requirements for things like that, but the amount of material in there is very low. And we believe that we're covered very well relative to the -- relative to anything regarding the EPA, FDA, things like that. The -- one of the issues will be going forward, as we try to commercialize the product into the consumer business will have to be on top of the -- labeling are more of the issues. Really it's a very safe product, and we are working with materials that are generally regarded as safe, and that people are very familiar with.

Would you comment on the Coatings business? You said there are other projects that are moving along, is that -- are we talking about the products that would mirror the -- the Ultra Guard, the NanoGuard products that sold through Behr, through companies, through other paint companies?

Well, the biggest -- if you look at that business, and we don't disclose that customer directly, but if you look at that business compared to the rest of the business, we believe that the bulk of the growth is going to be in exterior transparent stains and other types of stains. And probably the greatest part of our effort has been on UV blockers for exterior wood treatments, although we are doing a lot of other things as well. If you were to look at what we're doing, though, we're in a large percentage of the -- by volume of the coatings companies relative to producing stain in North America, in terms of -- either we're in testing or some form of development or other either through our business or through BYK Chemie. So UV, is a big part of that, but there is also scratch-resistance and other things.

So, but the exterior wood coatings, that product is not yet in the market place, correct?

The only marketplace -- the product that is in the marketplace directly is the Defy --

Right.

The clear wood stain, and they are introducing or have introduced the semi-trans, and the other ones are in process. And it's the matter of -- the cycle on specialty chemicals is this 18 to 36 month, potentially stretching beyond that time frame. And we're hoping that this year some of those things begin to pop, because we really started doing a lot of this work towards the end of 2008, beginning of 2009, and we would expect to see progress this year in that regard.

So actually -- I have lost track of the time, I guess, and it sounds like things are making a lot of progress in that area.

Well, it's amazing is, we had the big change to the business about a year and a half ago, and for me the time just flew by.

Yes.

I know a lot of our shareholders asked the same questions, and one of the things -- I probably ended up spending six months or maybe longer, stabilizing the business. And we worked on changing the business plan and we changed the strategy a little bit. And we kind of went through this -- and now I'm spending the bulk of my time either on -- of course you have personnel issues, but I'm very involved in the sales process and interfacing with customers, and doing a lot of traveling, and kind of doing the things I should be doing, and the things I was wishing I could have been doing from August of 2008, probably until about mid- 2009 -- and there was just too many things going on, and too many fires to put out through the change. And I think we are there now.

Well, that's -- it's really good to see the progress. Congratulations on your perseverance and your vision.

I appreciate you hanging in there with us as well, Jim.

Okay.

(Operator Instructions).

As there are no -- as there are no further questions in queue, I would like to turn the back over to Mr. Jankowski for any closing remarks.

Thank you. In summary, I would like to say this is a great Company comprised of dedicated, intelligent people. Of all the opportunities and challenges we faced last year, one thing hasn't changed, all of us are aligned with our strategic direction to build shareholder value and a strong viable Company, one that we all could be proud of. I appreciate your time today, and I'm always available for any follow-up questions you might have. Thank you very much.

Thank you, sir. And thank you, ladies and gentlemen for your participation. This does conclude your program. Thank you, and have a great day. You may disconnect your lines at this time.