Solesence Inc (SLSN) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nanophase third quarter investor conference call. At this time, all participants are in a listen-only mode. Later, we will be conducting a question-and-answer session, and instructions will be given at that time. (OPERATOR INSTRUCTIONS.) As a reminder, today's conference call is being recorded.

The words "expect," "anticipate," "plans," "forecast," and similar expressions are intended to identify forward-looking statements. Statements contained in this news release that are not historical facts are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect the Company's current beliefs, and a number of important factors could cause actual results for future periods to differ materially from those expressed in this news release.

These important factors include, without limitation, a decision of the customer to cancel a purchase order or supply agreement, demand for and acceptance of the Company's 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 today's host, Mr. Jess Jankowski, President and CEO. Please go ahead.

Good morning. We're happy that you could join us for our third quarter financial conference call. I wanted to begin today by calling to your attention the dramatic improvement in cash flow that we've experienced over the last nine months. I also want you to know that we're continuing to manage our business to provide a series of growth engines pushing us forward into positive cash with a base for continued successful results. We're not there yet, but we're well on our way.

During the third quarter of 2010, we continued our positive revenue growth trend with a 15% increase in quarterly revenue and a 57% increase in revenue for the 2010 nine-month period. The best news is that we remain confident that we'll finish 2010 with full year revenue 40% to 50% higher than in 2009.

Let's get started with our CFO, Frank Cesario, providing a financial overview, and then I'll come back.

Thanks, Jess. Good morning. This is Frank Cesario. I'd also like to thank you for joining today's call. You may have noticed that we changed the time for our financial conference call to accommodate our current investors and members of the financial community. As we generally speak to you only on a quarterly basis, please let us know whether you find this time change convenient. Please remember that all financial results being discussed today are stated in approximate terms.

We're pleased to report that revenue for the third quarter ended September 30, 2010, increased 21% to $2.1 million compared to 2009's revenue of $1.7 million, which happened to be the best revenue-producing quarter in 2009. Our positive revenue trend sets the stage as we expect to finish the year with a significant increase in revenues--40% to 50% over 2009 revenues--and position Nanophase for continued growth throughout 2011.

While our gross profit for the quarter was relatively flat, the margin percentage slightly lower compared to the same quarter of 2009, the gross profit margin for the 2010 nine-month period rose to 29%, considerable improvement compared to a gross profit margin of 15% in the 2009 nine-month period.

Again, I'd like to point out that the lowest gross margin percentage reported in 2010 was close to the highest gross margin percentage reported during 2009, yet another milestone for the Company's lean operating strategy. The net loss for the quarter is approximately $1.6 million, or $0.07 per share. This loss included a one-time charge of $700,000 related to a contract termination, which Jess will discuss later. Without this one-time charge, the net loss for the quarter is flat compared to 2009's third quarter. The net loss for the 2010 nine-month period was $2.9 million, or $0.13 per share, a sizable reduction compared to the 2009 nine-month period, which posted a loss of $4.2 million, or $0.20 per share.

Our balance sheet remains strong, as we finished the third quarter with no debt and $6.7 million in cash, equivalents, and investments.

I'd like to turn the call back over to Jess to provide an overview of the quarter.

Thanks, Frank. During the third quarter, we announced a major positive change in our long-term relationship with ALTANA Chemie, the parent of BYK Chemie. What had been an exclusive supply agreement for a broad array of nanomaterial applications has been modified to a non-exclusive supplier-customer relationship.

Over the past several quarters, we've discussed the expansion of our marketing plan to include both a partner strategy and a new customer direct sales strategy. Over the years, ALTANA's been a good partner, but for both companies, business strategies have changed and markets diversified. To better complement these changes, management of both companies decided to revisit our exclusive arrangement with an eye toward adding flexibility to our working relationship. Our exclusive agreement was scheduled to terminate in March of 2012, but we both recently agreed to terminate it early and replace it with a non-exclusive, five-year supply agreement. With this change, each side gains flexibility in serving its customers.

ALTANA initially made a significant investment in Nanophase products and market development during the six years since we embarked on the original agreement. In late August, in recognition of that, we agreed upon a $700,000 one-time charge to terminate the exclusive relationship and to create a non-exclusive supply agreement. Nanophase paid ALTANA $350,000 in cash and agreed to offer up to $350,000 in purchase discounts during the five-year term of the new supply agreement.

We believe this new agreement will benefit both companies. We remain on good terms with ALTANA and BYK Chemie, and we look forward to continue working with them under this new structure.

From my perspective, this new agreement allows us to more effectively market and sell to a much broader group of companies. The original agreement afforded ALTANA broad exclusivity for sales of nanomaterials to the inks, coatings, sealants, and plastics markets, among others. While this didn't limit our ability to market nanomaterials through our partnership, it did limit our ability to promote our suite of products, and certainly we couldn't promote any Nanophase branded products in any of these markets.

Further, with limited exceptions, we couldn't sell directly into these markets, but needed to pull any sales we made through ALTANA. These were limitations that had the potential to extend our times to market in these broad applications areas.

If you look back to 2009, you may begin to see a strategic pattern here. An example--during 2009 we also modified our relationship with Rohm and Haas, now part of Dow Chemical, in a similar fashion, from one of mutual exclusivity to a more traditional supplier-customer relationship. As our revenue has indicated, we benefited from the new arrangement, just as Dow can now work with a broader group of suppliers. As time goes on, we'll continue to explore various polishing opportunities, both with Dow Chemical and through additional direct channels as we identify them.

I'd also like to emphasize that the strategic changes to our agreements with ALTANA and Dow have no impact on our exclusive relationship with BASF. We continue to sell nano-sized zinc oxide to BASF for use as an inorganic UV blocker in sunscreens and other skin care products within the personal care market. Our relationship with BASF has been extremely beneficial, and we are committed to remaining their exclusive partner of nano-sized zinc oxide for the personal care market. They have been a solid partner and continue to provide a strong channel to market for our materials.

The BASF partnership continues to function as we originally envisioned it would. They have been, and continue to be, an important part of our success and an important part of our business going forward.

Now let me give you the status of several of our customer direct markets. Exterior coatings remains our largest customer direct market, and numerous projects continue to move through the development queues. In Nanophase's parlance, exterior coatings generally refer to applications that call for UV resistance in outdoor environments in an application requiring a high degree of clarity, like a wood stain.

We expect a number of these projects to roll out in 2011, with an expansion of the rollout in 2012. With all the testing that must take place, both in-house and at potential customer sites, the exterior coatings market continues to have the longest lead times. We expect the other direct markets we'll discuss to have shorter times to market. This is due to the fact that the related testing regime should be much less extensive.

With this year's introduction of the NanoUltra line of architectural glass cleaning and restoration products, our goal is to use the professional window cleaning market to develop modest near-term revenue, but more importantly, as a proof of concept and ultimately a platform to develop NanoUltra as a consumer solution. The $9 billion consumer market for product-based solutions is substantial and well developed.

We're continuing to build and service the professional market throughout North America and internationally, but we work towards successful application development in the consumer space. NanoUltra continues to develop, and we know we've yet to tap into the full market potential here.

Our marketing of products into other segments, including hard surfaces, which generally capitalizes on the abrasion-resistant features of our materials, polishing and plastics has increased our sales opportunities as well. We fully expect these segments to become larger components of our business in 2011 and beyond. You can expect to see one or more new product announcements pertaining to these segments in the coming months.

As a direct result of the negotiated acceleration of the termination of our exclusivity with ALTANA, activities to expand our marketing reach and to publicize our Nanophase branded products to markets like hard surfaces and plastics are being aggressively undertaken today rather than waiting until 2012.

I would now like to open the call up for questions. Ellie, could you please begin the Q&A segment?

(OPERATOR INSTRUCTIONS.) Our first question comes from Nicholas Peay, an investor. Please go ahead.

Good morning, Jess. Nick Peay.

Good morning, Nick.

Two little questions. One is just simple bookkeeping. On the balance sheet, we have an increase in cash of about $3 million and a decrease in investments of about $3 million. Is that related? And if so, what's the nature of it?

How about I let Frank handle that one?

Yes.

We entered the year with aucs rate securities on our books that we sold on April 1. So that was the transaction that moved the investment back up into cash. There was $4 million of auction rates that were moved out. There's another receivable on the book as well.

Did you get on par?

We're at a point where we're all in short-term government-backed securities and money market at this point, which is why it's all in cash. It's part of an accounting issue.

And were you able to get out of par on those auction rate securities?

We announced that we did get $4 million, there's $4 million par for those securities. Now, there was an auction rate security, just to finish it off, that we sold last year that we got out at a discount. But overall, we are out fairly cleanly.

All right. The second question is really the big one. Despite a 21% increase in sales this quarter over the year-ago quarter, even before the $700,000 charge, our bottom line was still a loss of $0.04 a share versus $0.04 a share. We don't seem to be spreading any overhead when we increase sales even as dramatically as we did here. Is it pricing? What's the problem?

Part of that, there's a product mix issue relative to last quarter. We also had a few maintenance items. I mean, the gross margin percentage was actually down year over year. Some of that is product mix, some of that is volume discounts that typically tend to happen. And we also had some one-time expenses.

Generally speaking, the direction we see is that things continue to get better. At the end of it all, we are suffering from the fact that our breakeven point is somewhere around $14 million, we think, give or take, depending on product mix. And until we're getting--if you look at last quarter, when we're in that $3 million range per quarter, we really do much, much better, and that's really absorption of overhead. I think generally our expenses categorically are down. They're down in every area, including, we had a lot more overtime in the first half of the year than the last half, but our usage of BL and all the production-related expenses is much more efficient.

That being said, we're still operating at a fraction of the capacity. Some of that is due to the fact that BASF has picked up quite a bit, and that engages a certain part of our capacity. The dispersion piece of the business, much of which is run out of Romeoville versus Burr Ridge, has yet to develop. And we didn't expect it to develop yet, but that's the point we're still sitting at.

So I would say I'm happy with the progress we've made regarding reducing expenses. There were some anomalous things in Q3. Q2 was a nice representation. On the cash side, we had some benefits I'd speak to as well, but on the expense side, I think you're likely to see that continue to shrink as we go forward. We're not seeing expenses creeping up. Probably the only thing relative to, and we haven't completely planned things out for 2011, we may see some increases, particularly in the selling area.

I'm keenly focused on our Company getting to the point where we're cash flow positive so that we can be viable and we don't have to worry about diluting shareholders and all these other things. But I am more focused on being a growth company and investing in sales and marketing. So the area that we don't want to cut is sales and marketing, and the area we want to invest in is that area. So you'll see a little bit more of that. You'll see margin growth. And hopefully, if we continue on the trend we're on, we should be in pretty good shape next year.

Great. Thank you very much.

You're welcome.

Our next question comes from Peter Cardillo of Avalon Partners. Please go ahead.

Yes, good morning, gentlemen.

Good morning.

I'd just like you, I believe you alluded to the fact that your margins were a little bit lower. Can you explain why?

Let me go into details. Only on a quarterly basis, and it was the lowest margin quarter of 2010 was a bit lower than the highest margin quarter of 2009. There's a combination of small factors that hits that. First of all, $2.1 million versus $1.7 million in revenue, revenue's somewhat close to begin with. Then you get into the details of what products are sold to which customers. And we had lower margin products in Q3 of 2010 versus, really, unusually high margin products in Q3 of 2009.

And then when you're talking about one or two points remaining, you're talking about small changes in the timing of maintenance in your facility and other cost items that you don't capitalize will have an impact there.

But if you look at, again, look at the nine-month figures, gross margin percentage is double what it was in 2009. We think that's more indicative.

Okay. And another question. Is there any possibilities going forward that you will expand in the Asian region?

That's a great question. We are exploring that in some areas. We have a partner in Japan, CIK, which was CIK Nanotech, which is part of Itochu, which has continued to work that area. We also have some interest relative to some polishing and other things.

And the challenge we have, and this is really--again, near term, we're focused on cash flow positive, long term we're focused on being a growth company. And the challenge we have is weighing the expense with the amount of grip you get in going through it. We are seeing some opportunities there that we think we'll be able to exploit. We'll probably know more about that in the next quarter or so. But most of what we have to do has to be done with help--external help--because what we don't want to do is have, at our size yet, have a permanent presence in an area like that or be there all the time.

But I think it's a fertile area, particularly for things like polishing, where a lot of the electronics work is done. And we are pursuing some of that.

Okay, thank you very much.

You're welcome.

(OPERATOR INSTRUCTIONS.) And I am showing no further questions at this time.

Okay. As I mentioned at the beginning of the conference call, we've experienced a dramatic improvement in cash flow this year, and we're happy about that. And we are managing the business to provide a series of these growth engines pushing us forward into positive cash with a strong base to continue that growth. We appreciate your patience as we carefully manage the process, step by step, to ensure lasting benefits to our shareholders and our customers and all of us. We're all here to build a bigger, better, and stronger Nanophase, and it continues to be my focus.

Thank you for participating in today's call, and we'll look forward to discussing our year end progress with you in several months.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect, and have a wonderful day.