Solesence Inc (SLSN) 2011 Q4 法說會逐字稿

Good day, Ladies and Gentlemen. Welcome to the Nanophase year-end 2011 financial conference call. At this time all participants are in listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today's call is being recorded. The words expect, anticipate, 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 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'd now like to turn the call over to Jess Jankowski, President and CEO.

Thanks, Shannon. Good morning, everyone. We appreciate your joining us for our fourth quarter and year-end 2011 financial conference call. With me today is our CFO, Frank Cesario. Reflecting back on 2011, I believe more strongly than ever that the changes we've made in our business model have been the right ones.

We've endured and then flourished while facing many challenges, including a significant economic downturn. This last year, one of our raw materials, a rare earth from China, called ceria, became temporarily scarce and was subject to skyrocketing costs. Additionally our largest customer negatively affected our revenue by reducing their inventory levels to deal with the sluggish economy. Last year, we also quickly adopted to significant regulatory changes, again impacting our largest customer, in terms of their product disclosures and their marketing efforts. Along with the backdrop of continuing economic uncertainty, these abrupt changes naturally stalled their business development activities.

Developing new market channels and creating innovative product lines for growth markets is always difficult, and in a tough economy it can be almost impossible. But, I'm pleased to say that we've been successful. In the past, these sorts of issues would have been enough to hurt our overall performance, but that didn't happen in 2011. Despite all of these challenges, revenue increased and our bottom line improved. My thanks to our customers and the entire Nanophase team.

Heading into 2012, the raw material problem is easing as more suppliers move into the rare earth markets, but the cost for these materials is still much higher than it was in 2010. We also expect the addition of new customers and markets to continue providing more revenue stability than we've experienced over the past few years. As we continue to refine our market-driven direct selling model, we're experiencing solid improvement in our success rate. We believe this is due to the time spent working through customers, and perspective customers, product testing and development cycles. Taking their valuable input and integrating it into our development process, has led us toward more efficient product development and targeted marketing activities.

This input has also allowed us to more quickly identify products and markets where we foresee only limited potential for success, helping us to de-emphasize these and apply our resources more effectively on others. The end result is a strong targeted pipeline and increased sales. Frank, would you please take a few minutes and provide the financial update?

Thanks, Jess. Good morning. This is Frank Cesario. Before I begin with an overview of our financial results for the fiscal year 2011 and the fourth quarter, please remember that all financial results are stated in approximate terms. Revenue for the fourth quarter was $1.7 million. We ended the year with revenue of $9.7 million, surpassing 2010's revenue of $9.5 million. The raw material Jess mentioned is the cerium oxide we use in products for polishing applications. Cerium oxide, while abundant, can be difficult to extract. China has imposed severe export limitations on its rare earth metals for the past 18 months, which resulted in both cost and availability challenges.

Fortunately, new sources of rare earth materials have been coming online and are projected to increase global supply. Also, as we head into 2012, China has not continued to tighten its export limitations, while the prices are still far higher than they were two years ago, they have stabilized. The high cost of cerium oxide raw materials, certainly hit our profit margins in 2011, but we still able to maintain a strong 24% gross margin. Cost savings initiatives are working closely with our customers help limit our exposure. As we move through 2012, we expect less of an impact on margins.

The net loss for 2011 was $3.4 million or $0.16 per share, which included $1 million in depreciation in excess of capital spending. This compares to a net loss of $4.1 million or $0.19 per share in 2010. Net losses on a quarterly basis were $1.3 million or $0.06 a share and $1.2 million or $0.06 a share, for the fourth quarters of 2011 and 2010, respectively. We spent $3.1 million of net cash during 2011. Approximately $1.1 million of it went into working capital, an area we expect to be positive in 2012. The remaining $2 million went to operate the business, including capital spending.

We continue to become more efficient, even as we develop new sources of revenue. With our current run rate, we could achieve cash flow breakeven with revenue around $13 million per year at $3.25 million per quarter. Our balance sheet remains healthy as we finish the year at $2.7 million in cash and equivalents and no debt. I'd like to turn the call back to Jess.

Thanks, Frank. Before I get back to business, I'd like to address an administrative matter. As we mentioned in today's news release, our common stock will begin trading on the QTCQB marketplace March 20. This is the world's largest electronic marketplace with over 160 broker-dealers, 10,000 securities listed, an aggressive growth strategy and a history that dates back to 1913. While the transition to the OTC marketplace does not change our obligations to continue periodic filings with the SEC, including our audited quarterly and year-end financial reports, our public costs will be reduced. An additional benefit of trading on the QTCQB, is the ability of our investors to view Level 2 realtime stock quotes and market makers for Nanophase. Also, our stock symbol will remain NANX.

Now, back to business. Looking back over the past two years, we positioned ourselves well to build our new customer direct business. We've maintained excellent business relationships with, and continue to receive revenue support from our former exclusive partners, as these relationships have migrated from exclusive to non-exclusive. We find that after renegotiating agreements with these partners, our relationships have actually improved, as we assume the role of a more traditional vendor.

Many of you have seen a recent announcement between Nanophase and CIK Nanotech. CIK Nanotech is a Japanese company that originally purchased the technology license from Nanophase to make and market certain materials in certain Asian Markets. That license arrangement is set to expire in April of 2013. In advance of that, we took a proactive stance, and all parties have already agreed to replace the exclusive relationship with a non-exclusive one when the original license agreement expires.

Armed with our recent experience, we expect to maintain a strong relationship with CIK Nanotech, providing us with a stronger position from which to launch our markets into the Asian Markets -- launch our products into the Asian Markets, that would be. As with our policy in business, and more recently our coatings additives business, we're transforming our CIK Nanotech relationship from one that is limiting to both parties, to one that allows us to better utilize our applications development strengths.

In keeping with the positive spirit in which we started these negotiations, we believe this change will be another win for both of our companies. Since 2009, we have renegotiated our three most limiting exclusive arrangements to better position Nanophase to leverage its strength. It has taken time, but these complex negotiations have allowed us to largely change the way we go to market. Where we were once almost completely dependent on others to market our products we are now marketing and selling directly to the end-users.

Most critically, where we were once dependent on others to serve as the technical interface with the end-users of our products, we are now able to work directly with them to insure that our materials are both easy to work with and effective in their applications. This has been a seminal change within Nanophase. We now have a solid pipeline of opportunities across several product lines in target markets, where we expect to create and grow new revenue for 2012 and 2013.

While we don't make annual revenue projections, we expect moderate amounts of new 2012 revenue from the following products. Our coatings additives products, primarily in scratch resistance but also in architectural coatings; new polishing products in various areas outside of our traditional CMP market -- you may recall that CMP refers to chemical mechanical planarization or polishing of semiconductor wafers; and inroads into several opportunistic markets with our innovative product. In 2013, we also expect to enjoy revenue growth from the maturation of a number of our coatings applications, and expansion of our new polishing products, and the introduction of some new products, which will begin in the first half of 2012.

Given our business cycle, these new products should begin to generate meaningful revenue in 2013. You should expect to hear more about these new products throughout the year. This new business is very important for driving our year-over-year revenue growth, since we are also experiencing flat or declining revenue in some of our mature products, particularly with ceria for CMP polishing. We expect our existing CMP polishing business to yield about half the volume in 2012 that it did in 2011, reflecting about a $1 million reduction in revenue as a direct result of raw material pricing issues. Ceria supply and pricing volatility have driven many ceria users in the CMP marketplace to find alternative technologies.

Now here is the good news. Despite flat or declining revenues in our core business, we expect it to remain strong, and we expect to gain more than enough new business in 2012 to offset any losses in existing business. These markers are the ones that I focus on most. This is important to me because it signals that the direct selling model is beginning to deliver. We're not out of the woods yet but we're moving in the right direction. Again, while we don't share revenue growth projections, we expect there to be measurable top line progress in 2012, and we expect it to come from new customers.

Operationally, we're now faster at evaluating opportunities and either converting them to commercial revenue, or halting development when we believe our resources could be better applied elsewhere. That's the front end of our business model. We carefully evaluate potential applications, and then we review their progress against expectations. This makes us a very different Nanophase Technologies Corporation from the one we were before 2009. We've applied everything we've learned, we've built a higher quality pipeline, and we're applying our hard won knowledge in everything we do.

I look forward to talking more about progress in our new application areas as we continue through 2012. As always, we plan to keep you posted on our progress through news announcements and conference calls. I know most of our investors listen to the webcast or review the transcript after the call, but for those on the line who would like to ask a question or share a comment directly, the floor is yours. Shannon, would you please begin the Q & A session?

(Operator Instructions) I'm showing no questions at this time. I would now like to turn the conference back over to management for closing remarks.

Thanks, Shannon. We're fully confident that we have the know-how, products, business strategy and potential to achieve our goals. We appreciate your continued support, and we're always available for any follow-up questions you may have. Thanks for your participation and enjoy the rest of your day.

Ladies and Gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.