Solesence Inc (SLSN) 2014 Q2 法說會逐字稿

Presentation

Good day ladies and gentlemen, and welcome to the Nanophase second quarter 2014 financial conference call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded.

At this time, I'd like take a moment to read the safe harbor. The word 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, 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 relationship, the impact of competitive products and technologies, possible disruption in commercial activities occasioned by terrorist activity and armed conflicts, 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 now, I would like to introduce your host for today's conference, Mr. Jess Jankowski, President and CEO. Please go ahead.

Thanks, Kate. Good morning everybody. Thanks for joining us today for our second quarter 2014 financial conference call. Frank Cesario, our CFO, is with me again today.

We have strong financial results this quarter, and we continue to see success in our ongoing business development efforts. At eye level, as we discussed briefly in the press release, our Q2 2014 revenue came in above that of the same quarter of 2013, and again, we were ahead of the average quarterly rate of last year.

Additionally, our Q2 bottom line approach [gap] breakeven and we even generated a bit of positive cash. While we haven't yet achieved regular positive quarterly cash flows, and don't expect to do so this year, we're well on our way.

As I said, this is a direct result of focusing only on the top opportunities, as well as running our business as efficiently as possible.

Even though this was a good quarter, I don't like to get caught up in incremental quarterly changes. They could be a distraction from what we're working to accomplish in developing sustainable business over the typically drawn out times the market companies experience in advanced materials applications.

We're all focused on increasing our revenue and our margins in a material way over the near term. We believe we've identified a number of markets that make our growth expectations sensible and, as I keep saying, the goal we're all after is to significantly increase the equity value of Nanophase.

After Frank provides a short overview of our financial results, I'll talk about our key business development goals for the near and midterm. These are focused on these main areas personal care technologies, surface finishing technologies, and energy technologies, including energy storage and solar control. Frank?

Thanks, Jess. Good morning, this is Frank Cesario. Before I begin today the overview of our financial results for the second quarter 2014, please remember that all financial results are stated in approximate terms.

Revenue for the second quarter was $2.9 million versus a revenue of $2.7 million for the comparable 2013 quarter. Gross margins were 36% for the quarter versus 32% for the comparable period 2013.

Net loss for the quarter is $100,000 or $0.0 per share, less than $0.005 per share, compared to a net loss of $500,000 or $0.02 per share during the comparable 2013 period.

The six months ended June 30th, 2014 saw revenue of $5.5 million versus $5.7 million for 2013. Gross margins were 32% in 2014 versus 31% in 2013. Net loss for the 2014 six month period was $500,000 or $0.02 per share versus $900,000 or $0.03 per share in 2013.

Many will recall that we had virtually no receivables at the end of 2013. We've rebuilt our working capital position to a normal level, and ended the second quarter 2014 with $2.4 million cash position. Other than working capital, cash consumed by the business was less than $200,000 during the first six months of 2014, and it was positive during the second quarter, as Jess mentioned.

Of the net cash outflow during the first six months of the year, all but $20,000 related to our modest annual capital spending, and prior to significant new revenues, the pursuit of which Jess will describe further. Our company remains debt free. Jess?

Thanks Frank. I'm happy with our financial performance for Q2, and I expect it to continue to improve over time.

Since the financial results speak for themselves, I'd like to visit our main business development areas. These remain our primary focus as we strive to build Nanophase to achieve the highest sustainable value possible for our shareholders and stakeholders. Again, they are personal care technologies, surface finishing technologies, and energy technologies, including energy storage and solar control. We expect these to make a meaningful difference in the near and medium terms.

Relative to personal care technologies, which is composed largely of our active ingredients for inorganic sunscreens, we're continuing to see good market feedback for our zinc oxide. We attended the New York Society of Cosmetic Chemists Suppliers Day Exposition in Q2, where BASF prominently displayed and promoted the Z-Cote line of product which, as many you know, have been designed and manufactured by Nanophase. Walking the show, speaking with multiple personal care companies, as well as in meeting with BASF, we see positive signs of continued growth for our products.

Our goal is to continue to develop new products in this space, and to see revenues continue to grow at least incrementally, if not better. We expect this market to continue to be a strong one for Nanophase.

Switching to what we call surface finishing technologies, which I consider to represent both near and midterm commercialization opportunities, we continue to expand our presence in the optics polishing market. We're doing this by engaging in various focused and industry-wide marketing activities, identifying and working with consulting experts and, most importantly, by keeping our feet on the ground in existing and potential slurry customers.

Recall that a slurry, in this context, is a proprietary mixer of chemistry and particles, both things being critical to success, that is used in various types of optics polishing machines to produce lenses and glass for many high-end applications. At the risk of being repetitious, advances in photonic devices and related lenses, mirrors, prisms and other optics are currently driven more and more by the demand for finer and finer surface finishes, which are achieved via precision polishing.

What perhaps has been an area that I haven't highlighted enough in the past, is that these manufacturers are also highly focused on achieving increases in throughput. Our slurries can provide these increases through enhanced removal rates and, more importantly, reduce process time required to achieve the desired surface finish.

Optics polishing is a capital intensive business, and we believe that we can offer multiple benefits in our value propositions in this market. To this end, we're continuing to expand our capability and direct application support for optics. We're further enhancing the polishing laboratory we built in Q1. In order to better serve our customers and potential customers, we've expanded the [vitrology] equipment and have plans to add a second type of polisher. These additions will allow us to address a greater part of the market more directly, and more effectively.

Some of the ways this lab will help us to expand our business development efforts are by allowing us to generate a more complete data package to open the door to prospective customers. We've also bolstered our analytical capabilities, which will help us in hitting each customer's ideal running conditions more quickly. Once trials begin and we're called on to bring in our trouble shooting experience into the mix, we'll be ready.

According to the limited feedback we've received to date, we're developing a reputation as a good commercialization resource in this market. We're doing all of this to enhance the sales process and to make it easier for our potential customers to make the decision to run trials with our slurries.

This is a bigger decision for them than it may first seem because most optics polishers prefer to do their new materials testing on the plant floor, sacrificing productivity today for promised gains tomorrow. This means it's harder to get them to break into daily production to run our slurries initially. Fortunately, it also means that the results of these trials will be more meaningful than those done at [land scale], and the further post-trial scale up on the customer side is less involved.

All in all, we expect these additions to our selling toolbox to help us to bring the business development cycle to a close sooner. To further capitalize on this, we also exhibited at the Optatec show in Frankfurt, Germany in Q2, and we believe we've made new contacts there that may translate into 2015 revenue, in addition to the existing development work we've been doing here in the US.

Currently, we have purchase commitments extending through year end that well exceed 2013's full year polishing volume. Our polishing revenue in total for 2013 was just a few hundred thousand dollars. We expect to roughly double that volume in 2014, then expand upon it further in 2015.

You know the way to look at this, we're addressing obvious market needs in our approach to this space, and we're continuing to receive positive feedback. Our immediate goal here is to build surface finishing technologies to a point where it exceeds $1 million in business to Nanophase in 2015.

Relative to our two new energy technologies, which I consider to be in the midterm commercialization group, we continue to make solid progress. We refer to these two areas as energy storage, referring to batteries, and now solar control, which refers to several applications involved with improving energy conservation. Our market reach has expanded to a point where we are now willing to be at least a little more specific in describing these areas.

For the battery work, since the last call, we've had meetings with three companies that produce more than half of the world's alkaline batteries. While due to confidentiality restrictions we cannot specify the details, we have active projects with the leading companies in this area. While we're further along in the battery applications than in solar control, based on test results and market feedback in both areas, we see opportunity for a very large, profitable volume across our energy portfolio.

Ultimate commercial success remains to be seen here, particularly given our limited past exposure to these markets, but we're making progress and both markets are demanding improvements that we believe we can deliver.

While it's difficult today to determine the revenue that will come from the first year of a product's future commercialization, we're pursuing these energy applications because we believe they can both contribute seven figure revenue in the midterm. In both of our energy businesses, we're making good headway toward commercialization. At the end of the third quarter, we'll be prepared to share more details around the timing for revenue in these businesses.

To summarize, right now our focus is very sharp in these areas. We see all of them, personal care, surface finishing technologies, and the two energy applications, as the markets where we can win in the near and midterm, and we're going after them aggressively.

I like where we are right now. With that, I'll finish up. Although most of our investors listen to the webcast, or view the transcript after the live call, we'd like to invite those participating in today's call to ask any questions you may have, or to share your comments.

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

Thank you.

(Operator Instructions)

And our first question comes from the line of James Liberman with Wells Fargo Advisors. Your line is open.

Thank you. It's good to see you making such good progress.

How are you doing, Jim?

Very well, thank you.

Good.

And I guess I wanted to ask, I had never heard this -- maybe I've been remiss -- but I actually haven't heard this comment about this solar control. Is that something you can talk more about?

That's because we haven't described it in exactly those terms in the past. It's an application to keep solar energy from entering things, mainly architectural or automotive type things. A couple different ways to go at it, but essentially it will be an energy saving application.

We've talked to it before about energy control and kind of avoided the specifics, partly because we were in the midst of meeting with several companies trying to roll it out. And what we didn't want to do was have anything floating around there before we had a better, stronger understanding of it.

We think over time it could be a really good market for us. It plays to our strengths. One of the things about it, and you know I can't get into the technical details, but essentially we have the ability to, as you know, engineer particles at the surface level, sometimes to the tune of creating multi-element single particle oxides that have different wavelength effects.

And so, in this case, we believe we've found a way to exceed performance in the market for controlling solar energy coming into something. So it's not a solar energy application. I've had people ask me about that. It's really solar control, you know keeping things from basically getting warm from solar or IR radiation.

Okay. Well that sounds intriguing. Also, regarding the polishing slurry business as it's starting to roll out again, one can get the impression that the opportunities there are really enormous. You've given some guidance that is relatively modest, could reach a million dollars or so a year. But couldn't this be a much broader business?

Yes, that's not -- I didn't say it could reach a million dollars a year. My goal -- our goal is that it will be at least a million dollars next year.

Okay.

It could be a much bigger business than that over time. The difference here, you know years ago we were very involved with a large -- with Rohm and Haas in the CMP polishing business, and we were providing basically a dispersion to them, and they were incorporating it into a slurry in a very different application, semiconductor wafer polishing.

In this case, we are actually -- we have engineered, designed and completely own the slurry. So we're selling a finished product to an optics manufacturer that has to do nothing to it but put it in their system. And with the experience we've built over the last 10 years, I mean these are the kinds of things, Jim, that weren't really available to us when we were still exclusive with Rohm and Haas, and then it became Dow.

Right.

And as we move forward, we realize these individual applications are not going to be as big. You know at one point we did over a million dollars' worth of business with just Dow. I think there are potential seven figure customers out there, there may be a handful, but I think there are many customers that are in that $100,000, $200,000, $300,00 to $500,000 a year range, and we bring some value to them. Particularly we're helping out on the plant floor. We're helping them help us to basically understand what their processing requirements are.

We built this small polishing lab. I've been leery to say, it's not really a small polishing lab, it's a relatively inexpensive polishing lab. And I've been concerned about transmitting to the shareholder base that we just spent a ton of money to do this. It wasn't an expensive thing, as much it -- we now have capability, and we're adding a second polisher any day now, we're waiting for it to be delivered -- to address a big chunk of the market.

And then on the metrology side, we have the same equipment as our customers have. So if you go back a minute and think about that CMP business, you know we were never going to have a clean room and atomic microscopes and $10 million polishers and all those things that are required to basically get down and dirty into the application to understand it.

The optics business is more straightforward, plays to our strengths, and fortunately, or unfortunately, depending on how you look at the history of Nanophase, in developing the quantity of products, dispersions and particles that we have, over the last years, really beginning in the Rodel days, but really getting ramped up during the [Bic] days when we were doing more of the architectural work, we built a high degree of expertise in dispersion chemistry. And then you put that on top of the polishing understanding we've built, we've got a nice combination.

I think this business will be different than the other two -- than the two energy applications, say, because it will be a greater quantity of smaller customers, whereas when we talk about energy, you're talking -- you know we talked to three companies that control more than half of the alkaline battery production in the world. So if we get one of those, and it gets rolled out, you know that could be sizeable revenue. Your hit rate is going to be lower, your upside is going to be higher. It's a different kind of selling. We're playing to our strengths here, and we're also very keenly aware that we have to build revenue in the near term.

No, I think that you've really put together a great profile, and it looks like you're doing, you're starting to execute much better. Thank you very much.

Thanks Jim.

(Operator Instructions)

Our next question comes from the line of Bill Chapman with Morgan Stanley. Your line is open.

Yes, Frank, good morning.

Hi Bill.

Hello guys. Could you give more clarity on the BASF, if they're promoting the zinc formulation you guys are presenting or offer? Is this getting ready to go into a bigger launch in Europe and other parts of the world?

Well it may very well. You know the business is growing. I know you're probably a little more up to speed on this, but for some of our investors out there, you know we're making an inorganic, a zinc oxide particle. We coat it. It's close to an all natural. The coating isn't natural. The particle is natural. And what they did was they exhibited -- they actually built something called a raw bar, which is pretty interesting, and they showed where their ingredients come from. And the Nanophase ingredients are a big part of that. You know we are their only inorganic sun blocker right now in our zinc oxide.

That business, in the United States, has been growing. You know our business is up -- I don't know the number off the top of my head, but I think our business is probably up 25%-30% over the last four years. It's growing in the US. There have been expansions in the European approval process to allow zinc oxide more room into their market. I'm not as familiar with all the FDA type requirements in Europe, but I know that for a long time, zinc oxide was frowned upon, except in Germany, and we're seeing it start to grow.

There is demand for zinc oxide in Japan, in China, in Korea, so I expect that demand to end up making its way to us. I do think though their focus is really on the natural piece, and building on the US market. They're also marketing internationally, but the show is the biggest US show, and it was mainly geared towards US customers, but that market, Bill, will continue to grow.

I have said that our goal is that our personal care area grows at least incrementally, if not more over time. The reason that I said that, instead of saying maybe it would grow more, is because it's a little difficult to understand the complete flow from the time it leaves here, to the time it gets to BASF, to the time that it gets to their customers. And we're not completely up on every inventory issue and how much somebody might have.

You know historically this business continues to grow. It's looking like at least last year's business so far, maybe a little better. And I think there's some significant upside for us there, but the upside there, because it's a mature market, isn't going to be a double. It's probably going to be incremental growth over a period of years.

I think something else to consider, that's interesting, that isn't as well known, and you know while this business grows, the share of the North American market that BASF has, keeps shrinking. Meaning, the total pie keeps getting bigger. They're servicing bigger demands from their customers, and there are more customers coming online. So I view this as a positive for the zinc oxide business, and really the inorganic business in general. You know there's also titanium dioxide, which we're not all that involved in these days, but that's another inorganic that's out in the marketplace and seeing some positive movement.

Okay, thank you. Let me ask you, on the batteries, you mentioned they were looking for some improvements. Is this something you can execute, are you hoping in the next quarter or two?

No. No. I mean it's possible. I mean it all depends what you mean execute.

I guess accomplish the improvements.

It is possible that we could commercialize this year, that will lead to some volume next year, but the more serious volume would be in 2016. I really think the -- you know if you look at the business and where we're sitting, the big drivers for growth over the next 12 months are going to be personal care and polishing. In addition to, you know we have a market basket of products that wax and wane a little bit, and we've gotten some positive feedback from some customers on a few things that are very positive.

But when I look at the battery business, I call that more of a midterm benefit to us, and in my head midterm is this all happens within a year. You know midterm I think is more like it might start to happen in a year and [a little bit] more like a year beyond that. But I do think it's a very viable thing.

And part of this, what you have to consider, is the -- I can't disclose where we're at, and we will talk more in Q3 about the timing of revenue, but there is a cycle relative to testing. And we do a lot of testing, and the customer does a lot of testing, R&D type testing, and the customer actually builds a series of batteries, and then they build tens of thousands of batteries. Then they make a trial run. Then they do a trial market. And then it gets rolled out into more of a full-blown market launch.

Those are things that we're learning about a little more, in terms of how that all is going to unfold. I think in the end, I can say with a degree of confidence that the battery application is seeing some traction in terms of the customers are giving us very good feedback, that we're doing some good things. That feedback's not complete yet. And hopefully, when we get to the end of Q3, we'll be able to share a little bit more.

Okay. Thank you very much.

You're welcome.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Mr. Jess Jankowski for closing remarks.

Thanks, Kate. We appreciate the continued support of our longer term investors, and we appreciate the enthusiasm and support of our new shareholders.

We're working hard here and we're seeing it pay off as we go. All of us continue to work toward our ultimate goals, I will say them again, of becoming an exciting company with significant growth and profitability. Thanks again for joining us today.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Everyone have a good day.