Solesence Inc (SLSN) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nanophase Technologies third-quarter 2014 financial results 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 follow at that time. (Operator Instructions).

In today's call, the words expect, anticipates, plan, 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 the number of important factors could cause actual results for future periods to differ materially from those expressed in the 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 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.

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Jess Jankowski, President and CEO. You may begin.

Thanks, Andrew. Good morning, everybody. I'm glad you're here. Thanks for being with us today for our third-quarter 2014 financial conference call. I'm joined again today by our CFO, Frank Cesario.

We had stronger financial results this quarter and we continue to see success in our ongoing business development efforts. At a high level, as we discussed briefly in the press release, our Q3 2014 revenue came in 20% above that of the same quarter in 2013 and, again, we were ahead of the average quarterly revenue rate of last year. Additionally, our Q3 and nine-month bottom line was significantly improved over last year's. As I've said, this is a direct result of focusing on our 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. Our business doesn't run quarter to quarter and our business development cycle is measured in months to years. We need to focus on year-over-year progress both in financial results and in plan execution. Our top goals will lead us to building a sustainable business over the typically drawn-out times to market companies experience in advanced materials application.

I also believe that the path from sustainable to exciting will be much shorter than the path from struggling to sustainable has been. We are all focused on increasing our revenue and our margins in a material way over the near-term. We believe we have identified a number of markets that make our growth expectations sensible. And, as I keep saying, the goal we are all after is to significantly increase the equity value of Nanophase.

That's when the exciting part will come in. After Frank reports -- provides a short overview of our financial results I will talk about our key business development goals for the near- and mid-terms. 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's overview of our financial results for the third quarter 2014, please remember that all financial results are stated in approximate terms.

Revenue for the third quarter was $2.7 million versus revenue of $2.2 million for the comparable 2013 quarter. Gross margins were 30% for the quarter versus 24% for the comparable period in 2013. The net loss for the quarter was $0.3 million or $0.01 compared to a net loss of $0.6 million or $0.02 per share during the comparable 2013 period.

The nine months ended September 30, 2014, saw revenue of $8.1 million versus $7.8 million for 2013. Gross margins were 31% in 2014 versus 29% in 2013. Net loss for the 2014 non-month period was $0.8 million or $0.03 per share versus $1.6 million and $0.06 per share in 2013.

Many will recall that we had virtually no receivables at the end of 2013. We have rebuilt our working capital position to normal levels and ended the third quarter 2014 with $2 million cash position. Our company remains debt free.

Jess?

Thanks, Frank. I'm happy with our financial performance for Q3, and I expect it to continue to improve over time. As the financial results speak for themselves, I would like to offer updates on our main business development areas. These areas are our top focus as we continue to build Nanophase to achieve the highest sustainable value possible. Again, they are personal care, surface finishing, and energy technologies, which include energy storage and solar control. We expect these to make a meaningful difference in the near and medium terms.

Relative to personal care, which is composed largely of our active ingredients for inorganic sunscreens, we are continuing to see a good market for our engineered zinc oxide. We are on track for a record year in terms of zinc oxide volume and we believe there are positive indications that, within a range of normal fluctuations, this is a sustainable to growing business for Nanophase.

In addition to existing demand, which is primarily based in the US, regulatory changes in the EU are in the pipeline which should present opportunities for growth in new markets. We're also working to develop new products for this market, and, broadly, we expect to see revenues keep growing incrementally or better over time. We expect this market to continue to be a strong one for Nanophase.

I would like to cover personal care technologies first because it currently contributes the most to our bottom line among our top areas of focus. That said, this is the most mature of our current business development areas and, although a great financial foundation for Nanophase, this is not what will propel us over the top.

In terms of the surest near-term growth, that would be in the surface finishing technologies market. This area is very different from any other area that Nanophase is currently developing in terms of how we approach it and the customer and market profiles involved. This is a market that includes many medium-sized companies that may each ultimately buy low six-figure amounts of our polishing slurries. To reach these customers we have to do more technical support and we have to develop greater applications data to support the selling process than we do in our other markets. That's why we invested in our polishing lab earlier this year. Many of you have discussed that with us, and we've discussed that in our press releases.

Our buyer is typically an engineer, which in some way makes for an easier sale, although no sales are truly easy. This is the market where we have the greatest near-term upside and where we can have the greatest direct impact on accelerating commercial adoption and building sales.

At this point we still expect our 2014 surface finishing revenue to roughly double 2013 volume and be in the mid-six-figure range. For 2015 we expect her surface finishing volume to roughly double again with upside potential beyond that. At that rate we should crack into seven figures in volume next year and have room to grow. Of the four key areas we are focusing our business development efforts on, we expect this market to have the greatest impact on 2015 growth.

Our two new energy technologies have the time to market which puts them in the near- to mid-term commercialization group versus the near-term surface finishing, or polishing, activities. We are moving forward both on the energy storage application, which refers to batteries, and in the solar control area, which refers to several applications involved with improving energy conservation.

For the battery work, since the last call we've had a large battery manufacturer duplicate the results we used to validate our value proposition, along with another large manufacturer that is now going down the path of manufacturing their batteries on a small scale production basis incorporating our materials to test our value proposition further. While due to confidentiality restrictions we can't share more details, we have active projects going with several companies where we hope to see one or more move past the test phase into the commercialization phase in 2015.

We still have a way to go prior to commercialization decisions, but we expect commercial revenue in 2015 followed by larger volumes in 2016. As I mentioned last time, we are further along in the battery application than in solar control. But based on test results in market feedback in both areas, we see opportunity for very large, profitable volume across our energy portfolio. I will repeat also that ultimate commercial success remains to be seen here, particularly given our limited past exposure to these markets. But we are making progress and we continue to make progress. And both markets are demanding improvements that we believe Nanophase can deliver, and we are seeing some proof of that in these validations of our value proposition.

While it's difficult today to determine the revenue that will come from the first year of our products' future commercialization, we are pursuing these energy applications because we believe they can both contribute seven-figure revenue in the near- to mid-term. In both of our energy businesses we are making good headway toward commercialization.

To summarize, right now our top focus is in these areas. We see all of them -- personal care, surface finishing, and the two energy applications -- as the markets that can improve Nanophase significantly in the near- and mid-term. And that's where we are devoting our time and money. We are in a good spot today.

On that note, I will tie things up. Although most of our investors listen to the webcast or review the transcript after the live call, we would like to invite those participating in today's call to ask any questions you may have or to share your comments. Andrew, would you please begin the Q&A session?

(Operator Instructions) Bill Chapman from Morgan Stanley.

Congratulations on the progress on, in particular, the battery side. It's very, very exciting on the small scale production being initiated and that's really good to hear. Let me ask you, Frank, if I could, please, about the trade accounts receivable. You got about $1.3 million in there versus $52,000 in December 31. Could you address that, please?

Sure. The end of December 2013 was an anomaly. Our fourth-quarter shipments tended to go in the first half of the quarter almost exclusively. Customers paid right before the end of the year. Everything that could be atypical in accounts receivable for a company that collects its receivables on a timely basis happened in December 2013. So as we have tried to say every quarter, that was the outlier. So we ended 2013 with more cash and less receivables than we intended, and that was fixed as we got into 2014.

If you look at this Company's history, about $1 million is a typical end-of-quarter accounts receivable value. And that's about where we are timing it now. Again, it fluctuates depending on the timing of shipment.

Okay, thank you. Let me go back to the battery -- just one question there, please. You mentioned that one potential customer was successful in doing a duplicate. I guess it would be like a verification of things. Now, could you tell us what this proposition really centers around? You mentioned lower cost before. Is performance, like better amperage or better --?

It's a combination of things, Bill. Essentially this is in alkaline batteries and we're producing a material that -- and we have a patent applied for so I don't want to talk about too much detail. But basically we are producing a material that replaces a much more expensive material that helps eliminate gassing in batteries. So when batteries are active, they always generate hydrogen sulfide and other things, hydrogen particularly, which is why in the old days you saw a lot of batteries exploding, if they have sat in the flashlight for too long -- it still happens. And we believe we have a replacement for that that will be more competitive than what they are using cost wise. And in some of our testing you actually can improve the life of the battery.

Now, the company in question has duplicated our testing, which is exciting because at core Nanophase is not full of electrochemists; we're not a battery company. We are a material company. And so the testing we did went to a local lab that that put things together, ran some tests for us. We duplicated what we could here with our minimal facilities. When I talked about we set up a pretty solid polishing lab, we don't have anything like that relative to batteries.

So it was exciting to have a marquee company duplicate our results. Now, they duplicated the results we had and now they've got to do it with their materials. And we used test materials that were available in the market that aren't necessarily representative on an individual basis of a given company. This is a lot like Kentucky Fried Chicken or Coke; everybody has their own formula for what the guts of their batteries are and they don't care to share them.

So what we do is we collaborate with several large companies and share data. But it stops at sharing the guts of what's in there. In our perfect world I would like to have the anode materials and everything from all the companies we are working with so we could duplicate the testing. But part of that gives us a competitive advantage when it comes to negotiating down the line.

So, I'm excited about it. I know that we have another company, as I mentioned, that has done a production run and is putting our materials in batteries and is starting on testing. And as you might imagine, the testing is -- there are multiple ways to test batteries. There's a fast discharge, intermittent discharge, low discharge. The low discharge takes months to test. And so we know that this takes time but we are getting consistent feedback. And I would say, relative to -- for the old-timers on the call, the people that have been around, this is not the kind of test cycle like two years of testing. This is months, and we are getting consistent positive feedback in the batteries area, which I take to heart as a very positive thing.

We are also -- we've got feet on the ground. We are out there visiting and talking to these people regularly, got a dialogue going. In my experience, which has been both painful and positive over the years, is that these people aren't talking to you and spending lots of development time and product development time and plant floor time unless you've got something there. So, I'm positive about the direction we are going.

Okay, good. And what are your current thoughts on exclusivity?

We've reserved the right in every case that we are dealing with to have that. And so the question becomes really what the market's thoughts are on exclusivity. In a perfect world, we would all like a big honking exclusivity payment and then a stream that goes on beyond that. We have -- the companies we are working with are well aware that that's on our list of things to pursue if it's available and are willingly under that kind of umbrella, willing to do the testing. There are a few companies that we haven't worked with specifically because they don't want the rug pulled out if we decide we are going to go exclusive.

And this is a long process. We may or may not go that way. My thoughts on it are we will always do what accretes the most value in the long-term to the Company. And at this point, it's not really clear. It may be that by supplying this material broadly we get the biggest possible market hit or it may not be. And I think that needs to be determined over a period of time.

Okay. Thank you very much, guys.

[Rand Kay] from [RKA].

Nice results. Actually, my question has a little bit to do with to dovetail on the last question. And it has to do with the concern around adoption of new technology for some of these companies without the viability of second source. And so my question is, while I understand the exclusivity situation, what is your philosophy approach with some of these companies in the development stage from second-sourcing requirements, since those are pretty much going to be paramount to any company for the adoption of new technology?

Well, we recognize that that may be a concern. We haven't been seeing that concern in this market. With BASF we are sole-sourced and we have been for years. And I think that adds to the confidence level of a lot of the potential customers down the line. I think also, frankly, our relatively low, small size, the level of resources we have makes these companies comfortable that they have the ability really to impact us. If they were required to step in and guarantee a source somehow by helping us to do that, I think they could. Lastly, I would say, while the materials we produce are unique or close to unique, the raw materials we use to do it are not.

So I would think the biggest issue we've ever had as a company was the Chinese rare earth problem a few years back. And in addition to that being mitigated, the materials that we are working with, particularly in the battery area, are not in that class of materials. There really is -- the plasma process that we used to manufacture things gives a different surface chemistry, different surface quality to these particles than you can get by other means. I'm sure -- as soon as I say that I'm sure somebody is out there right now trying to figure out a way to make their own version. So really, it's not -- the sourcing risk to those companies is more of a Nanophase direct risk than it is that we can't get more material. And I think they look at it and say, okay, we've got a sub-$20 million company here with 50 employees that has been delivering FDA-quality materials in the 100-ton quantities for years. And I don't think it's a big deal.

The reason I say that -- I don't mean to be cavalier about it all, Rand, is that it doesn't come up. So it's one of those things that -- we internally, we do a lot of risk analysis internally. That's one of the things we're always concerned about, that we are being responsive to that. And to the extent we can, we always look at our sources of raw material and make sure that we are not sole sourced on anybody. And in the vast majority of cases we are not, or we have an alternative that may be inconvenient but it certainly would be effective.

Okay, and the last question is you guys seem to be doing a very, very good job of massaging the lumpiness out of the P&L. And I'm wondering if you might have some better color on when you think a breakeven target looks promising.

Well, I wish we could take more credit for massaging the lumpiness. A big chunk of it has to do with the demand for sunscreen materials has been more uniform as we go -- last year's fourth quarter was anomalously low, apparently, which is what drove the other earlier question about the AR, that the second half of the quarter there was no volume.

In terms of breakeven point, that for this Company is in the -- to do it for an entire year on a regular basis, is in the $12 million plus range. For the nine months we burned less than $200,000 in cash. When I speaking breakeven at $12 million I'm talking about cash breakeven, not GAAP breakeven, which is probably a few million higher. But I think that is possible, given our outlook going into the year. I'm not willing to predict it as a forecast, but we have enough volume in our pipeline and enough expected volume going into the year that it's something that we could do next year.

And I would say my confidence level is much higher saying that that it would have been this time last year, just based on the fact that -- I keep beating up these four areas that we are focused on. And part of that focus is that we just have gotten good market feedback. We're getting regular market feedback. We are very engaged on the policy side, which is like our -- the safe business where we are going after smaller but sizable chunks of business and we are seeing that grow. And then we got the energy areas which are larger, and good feedback there. I think we're going to see some growth into next year that is better than the growth we have seen over the last several years, not counting the big change from the trough in 2009. But it's quite possible we hit it next year.

And it's a keen goal internally. One of the wrestling matches we always have philosophically is we do not want to breakeven at all costs, because ultimately everybody is here for a good equity return. And right now -- and we could breakeven at this revenue volume today if we eliminated a lot of our product development support. And we think that that range where we get into that $12 million range allows us to continue to do product development, business development, strong marketing, go into new markets while feeding the beast here and keeping it going. And we've done a nice job. I forgot what our best quarter was this year. But I think up into the first six months I think we burned 75% of our cash in the third quarter just because it's such a small number. Was a $20,000?

$20,000 was our negative EBITDA through six months. That's like negative cash flow before capital expenditures.

Yes, for the first six months. We are right there. But we do have to spend some money on capital next year. We have people that need to be paid, and we have shifted a lot of that compensation to equity, which is so that we are better aligned with the investor body and all of our other stakeholders. But we also just have people not in the same position. Certainly, your leadership team here is very equity focused. And one of the things that I've been doing as CEO over the last several years has really been trying to push that down and explain -- our leverage is good. I can't give you a promise about how the stock is going to move, where it's [ultimately] traded. There's a bunch of issues that are difficult to define, but I do know that one good customer pushes us over that hump. Two good customers pushes comfortably over the hump when you're talking about the energy businesses, in particular. And we've got tailwinds in our personal care business, which is nice. So I think it's -- while not willing to project it for next year, I think that we are really close.

And as we get into the year it will be easier to talk about, and part of it -- I know our shareholders hate this degree of nebulousness, but it has a lot to do with -- we are chasing some big opportunities and they take a while to commercialize. And the initial commercialization is slow. But when we can share the initial commercialization, and maybe that's a few hundred thousand dollars in volume, that's going to be part of a launch that feeds bigger volume as we go. And that will be a real telling time for us.

Okay, guys. I appreciate it. It sounds very promising, appreciate the feedback.

[Ronald Prater].

Do you have enough cash to get there?

Well, that cuts right to it. We believe we do. One of the things that we want to avoid is having to raise capital from an equity perspective just because it dilutes everybody. In addition to diluting all of you, it dilutes all of us. And it's an area that we consistently monitor. We plan on being able to do that. I think, if we fall short of cash flow breakeven in 2014, that doesn't necessarily mean we won't have enough cash to get there. I believe we have -- we are close. As we just talked about, when you are talking about a few hundred thousand dollars in cash burn, we are doing a really good job of managing it and we are getting good market feedback and we are -- this is an area of huge focus.

But ultimately, just like you, assuming you are an investor, from my perspective every time we do that it costs everybody money. And I don't want to do that. Our best promise has not been shown publicly. And until that happens I view us as being undervalued. Without sticking my neck out in a non-Safe Harbor sense, I think that to me I certainly don't want to sell shares in Nanophase at $0.45, $0.50 a share when I think there's all this latent value here. And essentially, our biggest revenue drivers have yet to be commercialized. So, I think we are in good shape there.

I fully agree. Nothing to add to that really. Just know that we are always ready to do for what we have to do. But, as Jeff said very clearly, our goal, our plan is not to raise additional cash to achieve breakeven. We think the business is very close right now.

Okay, thanks very much.

(Operator Instructions) Bill Chapman, Morgan Stanley.

Just following back to the battery, this component you are putting in, we've talked about it being substantially lessen cost for the battery manufacturer. Is that still accurate?

It is. And it would be a material that would generate good margins for us, give them a benefit. We are working through that, and all of it -- you never know for sure until you get there because everybody -- interestingly, in my business, this business, you don't get the brass tacks to somebody actually puts it into production. But we believe we are going to be able to provide a benefit to these manufacturers both in the cost sense and in the performance sense. Our internal value proposition proves both. We are working with them to prove both.

We believe at a minimum in a cost sense we've got an advantage. And that should be helpful, and this is an area that there's a fair amount of volume. It's not the biggest volume area in the battery world, but it's definitely that seven-figure volume range. Eight figures, I don't know; it just depends where this goes. But if it does go, it starts to move, we will start evaluating other areas in the battery markets to look at. At this point with our size, scope, and focus on bottom line, we've got about all we can bite off in chasing the markets we are in.

Okay. Now, the battery manufacturer -- what kind of the capital expense will they have to change from what they are using now? I assume there's not any. It's just changing your material.

I don't know that for sure. Our assumption is the same, though, Bill. Typically, we have -- we run the spectrum on that relative to products. In personal care, people that are using zinc oxide all along, our material is a direct drop-in. In polishing, some of our materials are drop-in's, some are not. We believe in the battery application it's not going to require engineering on the part of the companies either to our format or to what they have in existing format to work with.

Now, there is also the potential, which is difficult for us to ascertain, that they could decide to use more of our material than they used of the more expensive material and reduce the quality of their package because it wouldn't be required to be as strong. Those are things that are difficult to postulate. And at the end of the day, until we get these customers commercial, it doesn't behoove them to share some of this information with us because all it does is put us in a better bargaining position.

Yes, that's right. Okay. Well, thank you again.

(Operator Instructions) I am seeing no other questioners in the queue at this time.

Okay. Thank you, Andrew. We are glad that all of you are along with us on this exciting ride, and we believe we are turning a corner. We are happy about that. We are happy you are here with us.

I keep saying it because I keep thinking it and we keep approaching the business this way. We are working hard to build a sustainable company that becomes an exciting company with exciting returns to all of our stakeholders. Our hard work continues to pay off, and we expect this success to accelerate next year. Thanks again for joining us today.

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