Solesence Inc (SLSN) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nanophase year-end 2010 financial conference call. At this time, all participant lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

Before we begin, I would like to read the following forward-looking statements. The words expects, 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, the 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 [distribution and] 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.

And at this time I would like to turn the conference over to Mr. Jess Jankowski. Sir, you may begin.

Good morning. We appreciate your participation in today's 2010 year-end conference call.

Delivering on our marketing strategy, managing costs, and executing in the marketplace drove our improved performance in 2010. This was a pivotal year for Nanophase.

We established a number of important milestones for 2010 and '11 and I'm pleased to say we met many of them in 2010. This resulted in a 50% increase in revenue for the year and positioned us for continued growth through the next several years. Our expectations entering 2010 were high and we are optimistic about our continuing success as we enter 2011.

Frank, would you please provide a brief review of the financial highlights for 2010 before I keep going?

Thanks, Jess. Good morning. This is Frank, Cesario, I have been with the Company for almost two years now and I am pleased with our successful evolution into a debt-free entrepreneurial company that is working smarter and delivering more with less.

Before I begin with an overview of our financial results for the fourth quarter and year-end 2010, let me remind you that all financial results for these periods are stated in approximate terms.

For the fourth quarter, we were pleased to see revenue increase 29%. We reported revenues of $2 million in 2010 fourth quarter versus $1.6 million for the comparable quarter of 2009. Each quarter of 2010 resulted in higher revenue than its comparable 2009 quarter, a trend we expect to continue as we enter 2011.

We were also pleased to see an improvement in gross margins on a comparable quarter basis. Gross margins for the quarter were 18% compared to gross margins of 14% for 2009.

The net loss for the quarter was $1.2 million or $0.05 per share versus a net loss of $700,000 or $0.03 per share for the comparable quarter last year. This is due in part to a small increase in R&D expense as well as SG&A for the fourth quarter of 2009 and -- sorry -- for the fourth quarter 2010 and 2009 had a one-time benefit of $440,000 to the reversal of impairment charges on auction rate securities that we sold at par.

For the year, we reported revenue of $9.5 million, a 50% increase when compared to $6.3 million for year end 2009. Our growth in revenue produced an exceptional year for gross margin where gross margin dollars increased by 165%. Gross margin's percentage of revenue for the year is 27% compared to 15% for 2009, indicating better usage of our fixed assets and the benefit for a full year of more efficient operating structure.

Net loss for the year is $4.1 million or $0.19 per share versus $4.9 million or $0.23 per share for 2009. It is useful to note that we took a one-time $700,000 contract termination charge in the third quarter of 2010. 2009 featured both a severance charge of $800,000, offset in part by a reversal of prior asset impairment of $440,000 that I mentioned earlier.

Jess will discuss the impact of this contract termination [and] reconfigured customer relationship in his discussion.

Our balance sheet for the year remained strong as we finished the year at $5.7 million in cash and equivalents. And, again, we have no debt.

Due to dramatically increased costs and supply concerns involving certain commodities, particularly ceria, in our business, we were forced to use substantial working capital for securing inventory that we received orders for in December 2010.

Currently we have purchase orders in hand for products using most of these serials allowing us to monetize the incremental costs during the first half of 2011. It is difficult to determine how long these inflated prices will continue, but please note we are monitoring the situation closely.

Now I'd like to turn the call back to Jess Jankowski.

Thanks, Frank. We began 2010 with the history-making launch of NanoUltra, a breakthrough end-user product for commercial window restoration and cleaning. Then, later in the year, we launched our NanoArc aluminum oxide dispersions for scratch-resistant coatings. Finally, we finished the year with a 50% increase in revenue. 2010 was a good year for Nanophase on many fronts.

We are happy that our relationship with BASF is stronger than ever and we expect we will continue to build our business within BASF as their distribution within the personal care products industry looks to gain even more momentum.

Also, as 2011 unfolds, you'll be hearing more about our NanoArc product line. As I mentioned, we launched our aluminum oxide dispersions for use in UV-cured coatings late in 2010.

Our nano-based aluminum oxide enhances UV-cured solutions by providing very thin, durable, and highly transparent coatings with superior scratch and wear resistance. We expect these important advantages to protect and extend extend the lives of thousands of products, from cell phones and computers to wood furniture to graphics for art packaging and magazine covers.

As Frank mentioned, in 2010 we also terminated an exclusive, long-term joint development agreement, and then replaced it with a new five-year non-exclusive supply agreement. This new agreement with BYK Chemie, a subsidiary of Altana, has provided significant opportunities for our customer direct business model. Now we can engage directly with select manufacturers of coatings for electronics, wood products, and graphics to demonstrate the substantial benefits our nano-based aluminum oxide provides when incorporated in their UV-cured coatings.

Later this month, we'll be showcasing our new aluminum oxide dispersion solutions at the European Coatings Show in Nuremberg. This show provides the perfect venue for Nanophase to introduce manufacturers and potential end users to our new NanoArc products. Really, we'll also be introducing them to the new Nanophase.

This show is the big one. It's the largest global coatings show, alternating annually between the US and Europe, and will give us exposure to most of the universe of coatings manufacturers. We'll have more to discuss after the show, but we expect to achieve some new business in this area in 2011 with more building in 2012.

The scratch-resistant coatings markets for electronics, wood and graphics markets are critically different from the UV-resistant architectural coatings market that we've been developing.

Here are three key differences worth noting. First, the chemistries and the scratch-resistant marketplace are more straightforward, which should lead to quicker applications development and acceptance. Second, the premarket testing cycle should take months instead of years, as the bulk of the durability work we've done and expect to do, centers around scratch and rub testing. Remember, with outdoor wood durability testing, the industry standard requires several changes of seasons to fully understand the impact of the natural freeze-thaw cycle. That's not a limitation in this market.

And finally, we don't expect seasonal demand to have the same revenue cyclicality as with either sun care products or UV-resistant architectural coatings. Currently, the bulk of our business builds in Q1 and Q2 then tapers off to its lowest levels in Q4. This new market, scratch-resistant coatings, will provide a nice balance among our top markets in terms of times-to-market and seasonality.

Moving on, another highlight is the recent addition of Ed Tyler to our Board of Directors. Ed is a seasoned technology veteran with a solid background of nanomaterials solutions who brings his broad experience in technology commercialization to Nanophase, and also brings his knowledge of the financial community. We expect him to be a tremendous asset to the Company as we continue to expand our customer direct business model.

Our performance during 2010 provided a clear validation of our strategic transformation from an indirect supplier of nanomaterials to a direct seller of nano solutions. As with any major transformation, there'll be some bumps in the road, but we feel that we are on a solidly upward trajectory with a good outlook for the coming year.

Our relationship with BASF is strong, and the change in our business agreement with Altana will allow both companies to gain the ability to better capitalize on their respective intellectual property development and to provide more options and opportunities in our respective markets.

Another significant benefit of this new agreement is the freedom to sell nanomaterials not only through Altana's BYK Chemie division, but also directly to the coatings industry through our own sales and marketing activity.

This is all building up to the fact that 2011 will be an important year for the emergence of Nanophase as a stand-alone provider of solutions for the broad coatings marketplace. We believe our UV-resistant architectural coatings materials will begin generating revenue this year with a modest ramp-up in the last half of the year. We expect our scratch-resistant additives to generate revenue in 2011 also with growth into 2012.

We also expect to launch more products in 2011, some that should generate revenue this year and then ramp more significantly in 2012. We continue to focus on a variety of applications that differentiate our products from competitive products and target unmet needs in our four top target markets, which are personal care -- that is our sunscreen additives business; UV-resistant architectural coatings -- these are mainly for outdoor woods; architectural windows -- here we are looking for potential consumer applications; and scratch-resistant additives for electronics, wood, and graphics.

The speed at which we continue to make progress with our customer direct model will be directly affected both by the continuing economic trends and the normal timing of the adoption cycles in the markets and industries we serve. As I mentioned, we launched two product lines in 2010 and expect to launch one or two more toward the end of 2011. We are working with potential customers and their feedback will help determine the timing of these launches.

We started to see the benefits we expected when we launched this direct selling process two years ago and look to continue our momentum. As often as we discuss our capabilities, awareness of Nanophase amongst the broad universe of potential customers is still relatively low. We are working hard to change that, but this also means that there are still lots of opportunities here.

We look forward to keeping you posted on our progress. [Trinessa], please begin the Q&A session.

(Operator Instructions). [Constantino Gutierrez] with Ladenburg Thalmann.

Congratulations on the year-end results. Just wanted to ask you to expand a little bit about NanoUltra and the growth opportunity you think it represents for the Company in 2011 and 2012?

I think the -- in terms of --. You know we launched it at the very end of the first quarter of 2010. And we saw modest revenue in 2010 from it, relative to the commercial window cleaning and restoration market. What we've got there right now in that market is a stain remover -- as you may know, there are three products involved. There is a stain remover. Then there is a step one and a step two treatment.

And the step two treatment is -- culminates in a hydrophilic window or a window that essentially allows water to sheet, dry quickly and leave a window with not only less staining right after cleaning, but a window that stays cleaner longer. The stain remover is doing very well on the marketplace, but it is a small volume product and we continue to develop the professional marketplace in 2011, and we expect to see some revenue there. I don't expect it to be significant.

What we are doing in 2011, though, in a big way, is that as we alluded to in our press release, the professional window cleaning market is about a $600 million market of which about $30 million is materials. And the consumer market, window cleaning market is about a $9 billion market, the vast majority of which is materials. And we are working towards bringing some of those things to the consumer market.

Now I don't expect any of that to happen in 2011. I would think the earliest we would see would be the following year and what we will get this year are solid indications of efficacy there.

You know, we are not a --. We don't envision ourself as a consumer product developer as much as we are a nano solutions developer. And it will probably be some months before we see what the progress level is there. But I do see on an ongoing basis, that could be an area that generates some good volume for us, particularly given the leverage. At the size of this Company you know any significant volume really makes a big difference.

But in terms of a stake in the ground today and what I can look at as definitely resulting in consumer revenue this year or early next, I just don't have enough clarity to go beyond that.

Great. Thank you so much.

(Operator Instructions). James Lieberman with Wells Fargo Advisors.

Greetings. So, I'm very impressed with the progress you are making in the marketing of these new emerging products. Are you able to talk more about the scratch-resistant applications at this time?

Well, those applications generally -- I mean -- and I always tread the line on these calls because we have some -- we have got some brand-new investors that don't really know what we do. And then, we have people like you, Jim, that have been around for a while that really understand the premise.

But just back up the mountain for a minute. The premise of the scratch-resistant materials is twofold. We have got a very small particle that's basically invisible to the naked eye that is very hard.

And so to the extent that we could put it in the coating, and have it retained in the coating, we allow scratch and abrasion resistance in things that typically can't be achieved with organic chemicals. Now, so where we would play are areas where clarity is critical. Because essentially you can get scratch resistance from a much larger aluminum oxide particle, you just get a hazy coating.

So things like industrial flooring, say, where it doesn't matter what the color is, you can use a bigger material.

The added advantage here is that nanos hold up very well to UV curing and the coatings market, that is a growing area. You know, typically, when we are looking at our outdoor wood coatings, we are looking at UV-resistant coatings that are either water-based or they might be based in some sort of an organic, but they are either sprayed on our pain and on and they dry and that is how the curing happens. It's air curing.

In a UV-cured coating, that is typically placed on in a factory by an OEM. So on things like a handheld device, like a BlackBerry, you could UV-cure that. It gets a little warm, but not too hot to destroy the item. It gets warm enough and strong enough that it might destroy the organic that you could use instead of an inorganic, which is our material. So we have an edge there.

Some of the applications we are looking at are handheld electronic devices, things like PDAs. Graphics, which is an area that we initially didn't think there would be as much of a market for and essentially high-end graphics, arts graphics, packaging, magazines, have a lot of UV-cured coatings and one of the things they wrestle with all the time is that they get somebody to buy a $40 cosmetic or a $12 magazine, you have to have a really nice finish that doesn't scratch in transit.

Those are areas that we see opportunities in and we've got some alpha customer work that's been going on that has been positive. I can't disclose the customer and you can see, from looking at our 10-K, we have been saying the volumes there yet, but those are positive. And on the wood side, those are OEM-applied coatings to things like a furniture that has high luster shine where you want to see through that coating to the wood grain below.

I would say tha,t to reiterate a couple of the points I mentioned earlier, the things that we like about this -- that I really like about it -- are that we will know relatively quickly if we have got a nice play in this marketplace. Certainly by next year. You know, with the UV coatings, you've got a couple of years of freeze-thaw testing. You are looking at a three- to five-year time-to-market. It takes two to three years of testing before it goes to the marketing people who are -- yes, maybe they are giving you feedback all along, saying it's positive, but you are getting more feedback from the technical people than the marketing side.

Here we are looking at three to six months' worth of testing and then we are looking at plant work. So we should know -- which is why we will see some volume this year -- we should know this year and early next where this is going.

Additionally, the chemistry is a less complicated. You know, every paint stain, coatings manufacturer for exterior woods in the United States practically has a specialized recipe. In the UV-cured side of it, there are fewer ingredients in the coatings. It is a little more straightforward so the development time, we have to kick back and forth with that potential customer is reduced.

So now you've got reduced development time, reduced testing time that also means that when you go to Nuremberg in a few weeks, and we are out there selling our UV-cured products, those users are going to also know that there's not going to be as much of a tangle in just getting to the point where they have got a product to start testing.

So I'm optimistic that we'll get some progress here and at the very minimum, we will find out where the traction is going to be for us. And we should note that certainly by the end of the year. That is an internal milestone that we are looking at, saying, we should have a very good idea of the traction of this by the end of 2011.

And for us, that's kind of a departure. We have been in some very long lead time markets in the past.

That's very exciting to hear that. And best of luck on all of your progress to date and in the future. Thank you.

Thank you.

Thank you. Ladies and gentlemen, thank you for your questions. I would now like to turn it back over to Mr. Jankowski for any further remarks.

Very good. Well, I appreciate everybody attending the call. Very well attended call today. We've got quiet folks. My mom is not on the line so the questions stopped at a couple, I guess.

In summary, our strategy for 2011 hasn't changed. Our goal is to build shareholder value and a strong viable company, one that we can all be proud of. While we don't provide projections, we are moving into 2011 with confidence and a more complete family of nano-enabled solutions to enhance our customers' products.

Your management team expects to see a continued growth trend throughout 2011.

Again, I appreciate your time today and we always try to be available for any follow-up questions you may have. Thank you very much for attending the call.

Ladies and gentlemen, thank you for your participation. That concludes the conference. You may disconnect and have a wonderful day.