Solesence Inc (SLSN) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Nanophase Technology Corporation fourth-quarter 2014 financial conference call. At this time all participants are in a listen-only mode. Later there will be 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, 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 a 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 President and CEO, Mr. Jess Jankowski. Sir, you may begin.

Thank you, Shannon. Good morning, everybody. We are glad you are able to join us to discuss our outlook for 2015 and for our fourth-quarter 2014 financial update. Frank Cesario, our CFO, has joined me again today.

During this call we will be talking about the outlook for our four major growth initiatives as well as updating you on our existing business and, of course, 2014 results. We finished 2014 with better results than 2013, which I'm happy about. But I want to focus on where we are positioned as we enter this year, 2015. I see our progress moving Nanophase from doing the behind-the-scenes blocking and tackling required to develop business in our growth areas to a place where we expect to see concrete commercial results as in significant revenue from new sources beginning this year.

Starting with the 2014 results, at high level, as we discussed briefly in the press release, our Q4 2014 revenue came in slightly ahead of the same quarter in 2013, but each was the weakest quarter of its respective year. Additionally, our full-year bottom line improved by roughly double the increase in revenue over last year. Financial efficiency is a way of life here at Nanophase. We continue to improve upon every area of our business not just in business development.

Even given those positive results, as many have heard me say before, 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 focus on year-over-year progress both in financial results and in plan execution. Our top goals will lead us first to build a sustainable, then an exciting business over the typically drawn-out times to market the Company has experienced in advanced materials applications.

As we discussed last quarter, I also believe the path from sustainable to exciting will be much shorter than the journey from struggling to sustainable has been. I can see the path directly in front of us to significant revenue growth, which I believe offers the potential of increasing equity value for Nanophase.

That's when the exciting part will come in. After Frank divides a short overview of our financial results I will talk about our key business development initiatives for 2015 and 2016. These are focused on four main areas -- personal care technologies, surface finishing technologies and energy technologies including energy storage and solar control.

With that, I will hand it over to Frank.

Thanks, Jess. Good morning. This is Frank Cesario. Before I begin today's overview of the financial results for the fourth-quarter and full-year 2014, please remember that all financial results are stated in approximate terms. Revenue for the fourth quarter of 2014 was slightly ahead of the comparable 2013 quarter, but both periods round to the same numbers. Revenue $1.8 million, gross margin 16%, net loss for the quarter is $0.9 million or $0.03 per share. The full-year results ended December 31, 2014, saw revenue of $9.9 million versus $9.6 million for 2013. Gross margins increased 28% in 2014 versus 27% in 2013. Net loss for the year during 2014 was $1.7 million or $0.06 per share versus $2.5 million, $0.09 per share, for 2013.

As Jess stated, our bottom line improved by more than double our revenue growth. We ended the year with $1.9 million in cash. Our Company remains debt free. Many of you are aware that we have a $1 million cash covenant relating to an exclusive supplier relationship with our largest customer. We disclose more detail in our SEC filings. It is our intention not to raise permanent capital, opting instead to implement a temporary borrowing vehicle, should we need it to maintain compliance. This could certainly change in the future, but it is a way that our company is approaching 2015. We anticipate putting something in place by the end of March in order to deal with any working capital fluctuations.

Jess?

Thanks, Frank. While the financial results show a nice improvement, I would like to key in now on our main business development initiatives. These areas are our top focus as we continue to build Nanophase to achieve the highest sustainable value possible. Again, these are personal care, surface finishing, and energy technologies, which include energy storage or batteries, and solar control. We expect revenue from these areas to make a meaningful difference beginning this year, 2015.

In personal care, which is composed largely of our active ingredients for inorganic sunscreens, we saw another record year in terms of zinc oxide volume during 2014. We also believe there are positive indications that, within a range of normal fluctuations, this is a sustainable to growing business for Nanophase. We believe our expansion here is a reflection of a growing consumer preference for full-spectrum inorganic sunscreens, specifically zinc oxide and titanium dioxide, which are also referred to as physical sun blockers in the industry, versus traditional organic sunscreens like avobenzone.

Dermatologists have long preferred zinc oxide as a full-spectrum UV blocker and movement in consumer preferences has helped in this area. 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 and new applications there. We expect this market to continue to be a strong one for Nanophase.

I'd like to cover personal care technologies first, mainly because it currently contributes the most to our bottom line among our top areas of focus. This is clearly the most mature of our current business development initiatives and, while being a strong P&L driver for Nanophase, personal care is not what we are relying on to put us over the top. In terms of the surest near-term growth, that would be in the surface finishing market.

This area is very different from any other market that Nanophase is currently developing in terms of how we approach it and the customer and market profile 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. This is why we invested in our polishing labs mid last year.

Our buyer is typically an engineer and the actual end-user of our products, affording us a higher level of customer intimacy. This dynamic makes this a performance-driven sale, which manages our technology-focused culture very well. We now have the proper metrology and the proper application-level production equipment to allow us to pursue this business aggressively and with credibility. In the first quarter of 2014 we exhibited at Optatec in Frankfurt, Germany. Then we presented a good deal of homegrown data at the American Precision [Optical] Manufacturers Association, also referred to as APOMA, the technical conference in the fall which is very well attended by potential customers and industry opinion makers.

On top of that, we just got back from exhibiting at Photonics West in San Francisco last week. Photonics West is the premier North American tradeshow for the optics and photonics industry broadly, and Nanophase had the opportunity to solidify our name in the industry and meet with several current and many prospective customers during the show.

We are making our presence felt in this industry and we are being well received. This is the market where we have the greatest near-term upside and where we can have the greatest direct impact in accelerating commercial adoption and building sales. Our 2014 surface finishing revenue approach doubled the 2013 volume, in the mid-six-figure range.

For 2015 we expect our surface finishing volume to more than double from 2014 levels with upside potential beyond that. 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, probably beginning early in the second quarter.

Our two new energy technologies have a time to market which puts them in the near to midterm commercialization group, a little further out than our surface finishing or polishing activities. We are moving forward both in the energy storage application, referring to batteries, and in the solar control area, which refers to several applications involved with improving energy conservation.

For the battery work, during 2014 we saw multiple large battery manufacturers duplicate the results we used to validate our value proposition with entities actually manufacturing their batteries on a small scale production basis with our materials being incorporated to test our value proposition further. Although we originally expected it to materialize in late 2014, we now look for the commercialization phase to begin with more than one customer during 2015, to be followed by more significant revenue volume in 2016.

As I mentioned last time, we are further along in the battery application than we are in solar control. But based on test results and market feedback in both areas, we see opportunity for very large, profitable volume across our energy portfolio. Specifically, we've engaged some of the largest players in the industry along with some smaller players and believe we offer a significant value proposition with both applications in their respective markets.

I plan to spend more time talking about both of these energy initiatives as we get further into the year. We talk about making progress, which is both true and critical to the end result, and you know that I try to be cautious and avoid the hype. Without abandoning my long-standing approach, I will share my belief that our growth initiatives will yield meaningful new business revenue during 2015 and validate the strategy upon which the Company is based. I look forward to talking to you further as the story unfolds.

Before we go to the Q&A, I would like to some of the marketing outreach we've been doing. I hope that all of you have now had the opportunity to see our newly updated website, which is at Nanophase.com. Probably of greatest interest to many of you, we are ramping up in our industry marketing pieces, which are released on a targeted basis, unlike our investor press releases, which we send to a much broader audience. The purpose of these will be to establish Nanophase in the markets we serve or would like to serve by reaching out to various customer constituencies.

Our current focus is upon expanding our presence in surface finishing. If you navigate to the about us drop-down, then to news and events, you will see what we have been up to in this part of our business. As we mentioned in our press release, you can also find a quarterly summary of these things under the investor relations drop-down, choosing investor news, then 2014 Q4 recaps.

Additionally, we have expanded our presence on LinkedIn, Facebook, and Twitter, for those of you inclined to learn more about Nanophase via those sources. While you are on our site or investigating these other sources, you are sure to see that Nanophase recently celebrated our 25th anniversary. Anniversaries are not always very meaningful in the investment context. But in the high-tech business of developing and producing nano materials for cutting edge applications, 25 years speaks volumes. Our technology and our commercial activities have developed to a point where we have staying power.

I don't keep the statistics, but I imagine hundreds of nano driven companies have failed over this period. Most never bothered to develop a viable commercial proposition. Nanophase has real applications, real customers, and we sell hundreds of tons of nano materials every year.

Although most of our investors listen to the webcast will 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. Shannon, would you please begin the Q&A session?

(Operator Instructions) James Liberman of Wells Fargo.

Thank you very much for your presentation. My interest was really piqued by the comments you made about the increasing volume of interest in the surface finishing area. Can you broaden that a little bit, give a little bit more detail? I know you said that there are a lot of mid-level or midstream type companies or midsized companies that are interested in this. But can you give a broad idea of what opportunities are here?

Sure. This definitely represents, over a period of time, a seven-figure, up to mid-seven-figure or greater market for Nanophase. We picked it -- we started out -- some will remember for years we had an exclusive relationship with Rohm and Haas and then Dow. And while we were in that, we really didn't explore the other polishing areas much because we didn't want to diffuse our efforts or crisscross them in what they were trying to do.

We, during that time, had developed a few small optics polishing customers that were achieving very strong results. And we recognized, once we were nonexclusive with Dow, that not only were they achieving results but we weren't really doing much to support that market. And they were persistent customers, so we dug in, Jim. We started bringing in some consultants at first and then a seller with some experience in the market. And we realized that this is an underserved area and we have a lot of chemistry expertise. And what we brought to the table relative to ingredients supply for semiconductor wafer polishing we developed into a full-blown product.

So, unlike much of what Nanophase sells, say in the sunscreen business, where we are providing an active ingredient for somebody else to incorporate in a product, in the surface finishing business, particularly in optics, we are selling a complete slurry that they drop in. We found that those customers are very willing to be collaborative. We found that we have the technical strength to support those markets well. And we see a lot of opportunity there for us.

We about doubled our business last year, into the mid-six-figure range. We expect to better than double that this year, possibly greater. Additionally, the time to market is pretty good in this market. The downside -- from my perspective, what would be great is if every customer was gigantic and came to market quickly. Typically, what happens is the smaller, more nimble or entrepreneurial the company is, the quicker they get to market but the lower volume of material each purchases at the time. So when you look at our forward-looking -- when you look at surface finishing versus the two energy areas, where typically dealing with much larger companies in the energy space that have to have a development cycle, do a lot of product testing. On the surface finishing side, we are frequently there in the plant, helping them incorporate the slurries into their process, and the sales cycle is much faster.

Anecdotally, we even had a sale that was made in a small, new application while we were at the show last week. Somebody said, hey, could we try it for this? We got on the phone, we got samples out the door. By the end of the show they ordered the material. They won't be a big customer, but those are the kind of -- that's faster than most, but I would say, say three- to six-month time frame is more common in this market, certainly less than a year, which is very different from a lot of the markets we are in.

It also made me much more comfortable in making investments in metrology equipment. We have production equipment here -- small-scale, but actual production lab equipment -- that we are doing our testing, developing data on. And if it's of interest to you or any of the other folks listening, some of that is available on the website and on LinkedIn. We are putting out some technical papers and information. And it's pretty interesting.

So we are happy with the market. And I look at that as that's not the business that's going to make us a $100 million company but it is the business that, certainly, we have a lot of levers to pull on, we can move quickly in, and we have a history of strong technology in the area.

That's very helpful. So when you said drop-in, did I understand that to be that the applications, the products you have can be used without much tweaking? Or does every individual company have a slightly different application that requires a slightly different turn of the technology?

Largely, what -- we have several products now and we are developing more. There are probably, say, four or five products in our space in the market that are already out there that satisfy the bulk of the market. We don't have to tweak a product to work in every system. We do, however, frequently -- for instance, we've helped some folks get to a level of surface finish or quality that they cannot achieve with what's in the market. And once we do that for, say, customer A, assuming we qualify them and they are large enough, now we've got a new product that goes out to other customers.

We also have -- something that historically has been a struggle. We've achieved the ability to get a higher rate, removal rate, polishing rate in a lot of our applications in surface finishing than is available in the market, which with nanos is tough and speaks to the ability we have developed to understand and work with the chemistry. So we don't have to build a new specific solution for each customer.

We can, however, though, offer them a broader suite of products. And we have a deep enough level of understanding, particularly on the chemistry side, to work with them when it makes sense to us. And as you well know and a lot of our shareholders know, at Nanophase we're talking about a $100,000, $200,000 customer. Their leverage is pretty good with us. In my mind, that's worth spending time on the plant floor and some hours in the lab to get it done because at this point is material and the margins are good.

Thank you very much. I'll step back in the queue in case other people are asking, but I did have another couple of questions. But I can wait on them if it's more appropriate.

Okay.

(Operator Instructions) Bill Chapman of Morgan Stanley.

I wanted to talk about the battery and the solar control, if I could, please. We were talking several times now about it being lower cost and having better performance. So that is still being validated on all the tests that the end users are coming up with?

It is. It is. There are always challenges and there are always -- sometimes we talk about -- everybody talks about critical to quality or just noticeable differences, things like that. There are always those things that take a bit of time to get into the production cycle. But we are seeing in testing that we are equivalent or better than what -- in the battery business, we are equivalent or better than what they are using now and at a lower cost. We are also seeing, in the solar control side, that our performance is exceeding what's out there. But we are still working through some things there.

Part of it, Bill, is that to contrast polishing, when we work on a polishing application we have all the equipment here we need. We have all the metrology here we need and all and knowledge in-house to execute and build applications data. So we went to the APOMA conference in Arizona in the fall and we showed them data that is directly translatable to what happens on their plant floor.

When you get into the energy applications, that requires a lot more equipment to develop application-specific data. So we are a little bit reliant on the customer to still do some of that work because we're not ready to make it kind of an investment. So the feedback has been solid, but you always have to go between -- there's always a negotiating process, there's always internal dynamics that make things move a little slower, in addition to just the whole big company thing. There isn't a -- my history is long and storied, and I would say that I've never dealt with the company that was, say, north of $1 billion, maybe even $500 million, that doesn't have a very long cycle that has twists and turns that aren't logical.

We had a board meeting yesterday, one of our quarterly board meetings, and one of our directors made the comment, well, I can't imagine that people wouldn't -- the value proposition seems so strong it ought to be just a no-brainer. Well, it might be to the product manager or to the person directly responsible to the launch. But there are just so many people involved. It's one of the reasons that we are betting on the polishing business for being the biggest growth driver in 2015 and the energy ones coming on later in the year and then really seeing more volume the following year.

The value proposition is critical. We've established it. We've had it reaffirmed, which is always great. And that's one of the best things you could do. And the fact that our customers are affirming that we have a good value proposition is a great thing. That's a major hurdle. But there are still plenty of other twists and turns. So I know what I know and I know what I can move forward with a lot of our own effort. And some of the things we are just working through systems that we don't have as much control over.

Okay, thanks. The better performance this year, speaking of the battery, will last longer. Is that still what you are projecting?

Well, potentially it will either last longer or it would allow the manufacturer to include less of an expensive material in it to get the same performance. It really depends on the outlook. Without getting into any inside baseball, every manufacturer has a different profile and a different series of products. Some go on performance, some go on costs, some go on a balance, some will launch something as a higher-performance item and then eventually move that performance benefit into their broader product line. So it really depends.

But we have a material that replaces the more expensive material that does the same -- completes the same function as that material, as well or better than it does, at a lower cost. And in some cases, depending -- this is, again, it's chemistry, depending on the structure, every -- surprisingly, although all batteries pretty much look the same except for the label, the guts of them are different. And depending on the chemistry, we can extend the life or increase the power over a similar life. So there's a bunch of features that are interrelated and really depends on where the customer wants to take it.

Okay. Well, you've mentioned earlier and said in prior calls that the solar control was behind. But you are talking about both ramping up later this year and growing more materially next year. And could you clarify what you mean by being behind?

I mean behind --

The batteries.

-- The batteries. It's just a slower process. Part of it is how long the product is designed to last. So you've got an issue where, in the case of a battery, although it has to be in an uncharged state in the rack at Walmart for years, once it's in the unit it's powering, whether that's a flashlight or a clock or a camera, it's not designed to last that long, whereas when you are talking about solar control, which is typically going to go on some sort of glass that's exposed to the elements, it has to last for a period of time. So the testing cycle is longer.

Also there are fewer larger players in that market than batteries. So, whereas we might ultimately have 100 customers in polishing, we might ultimately have four or five customers in the battery business. We would probably only have a few in the solar control area, just based on the way the market is built.

Okay. And this is also a lower-cost component and performance for the solar control?

In this case, yes. It's a lower-cost component and a higher-performing component for the solar control. There are applications issues that we are still working through relative to -- as most of you know, you can get results in a lab, then you have to get them in the application. We have got them in the lab and to a certain extent in the application -- not universally in every application. And that's a question of just working through it with the customers. But I'm optimistic.

Okay. Thank you for telling me that. Now you mentioned commercialization rollout -- will this be on a limited basis? Let's just start with the batteries. It's just going to be a very small --

I think both would be on a limited basis this year. The issue is it will be scale up. And what we don't really know will be -- the first couple of slugs of material to fill a pipeline -- are they going to be a product line, a small product line, a new product line? Difficult to determine.

The first thing we have to do is get through the purchasing cycle within these customers and agree that we are going to supply a minimum amount of material at a certain price over the time and talk about logistics. And then I think what I anticipate -- and this is just me thinking; I haven't heard this from the customers. But what I -- directly yet. What I anticipate is that we will have a ramp. Some volume will grow, based on things they've told us in terms of their initial demand. And then after that I feel it has a lot to do with how well the material performs in the commercial package with consumers.

And if it continues to perform and they are able to trade on that benefit, whether it's a cost benefit or a performance benefit, volume should expand. And then I would assume, over a period of time, which will be a longer period of time, price will go down and volume will go up. But my visibility is a little bit limited at this point, other than knowing we are working our way through the cycle and I'm expecting progress on a commercial basis this year.

Okay. Well, I like that you are not letting this be an exclusive; you are spreading it out with many firms. And that's comforting to see.

Well, it's always a relative decision. It depends what exclusivity means to somebody. At this point we are keeping our options open.

Frank has a comment.

We started this in a brand-new space. And so we wanted to be completely above board and tell you that we didn't know if it was going to end up being exclusive with one customer or not. Having worked through it now, having progressed with multiple entities and how far we've gotten, we just don't see that as being possible, frankly. You never say never to anything, especially if it's a brand-new space for us.

But we have been a materials a supplier, an advanced materials supplier, an additive supplier, in a lot of different areas. This is another one of those. And we know what we are very good at doing. We've got a long history at it. It's starting to become that sort of proposition, which, frankly, is quite comforting.

To Frank's point, what I think is off the table is an upfront exclusivity that keeps us out of the market initially. If that were to develop over time, what would probably happen is we would be in the market and then somebody would want to license it or do something in that regard, and ideally we would have a much better view of the potential, which is where we'd rather be, anyway.

Okay. One question on the amount of money you are going to borrow -- are you talking $0.5 million to $1 million, somewhere in that range?

Well, so, to be clear, and I wanted to get ahead of the whole cash issue -- we entered this year with $1.9 million. We all know we have a $1 million covenant for the exclusive supply arrangement. It is our intention, it is our plan not to raise any permanent capital at all as we go through the year. Now, obviously, we don't have a lot of access there. But that's our plan.

Now, I wouldn't be doing my job if I weren't ready for any working capital fluctuations. So it's my intent to put something in place, hundreds of thousands of dollars, something small to deal with any time that we might be just under that $1 million mark or afraid we might be just under that $1 million mark. But at this point, that's our intention.

Okay. Okay, that's good to hear. One last question -- do you for see going to any investor conferences this year?

Probably not, Bill. My view on that is that I made the comment that I am pretty conservative about sharing information. And for the most part, until we start seeing this commercial success, particularly with new business development, I just don't think there's enough to talk about. I also -- if we are being frank here, we've got just under 50 employees. I'm part of the business development cycle here, to an extent. So is Frank. The entire team is involved on the customer side and working that. And I would, at this point, prefer to spend my time on those things.

I do foresee a time when Frank and I together and individually are doing a quarterly sort of investment talk somewhere, if either online or going out and making some trips. But at this point I think, given the way we manage resources and not trying to invest in advance, I'm not there yet.

Okay, thank you. Thank you for everything.

[Rand Kay] Of RKA.

Some exciting news -- I don't want to continue to harp on this. But I am interested in understanding a little bit about the cash flow situation. I understand that the new polishing lamp has yielded great results. Are any capital expenditures that you guys are planning for the future, for any of the business segments -- do you plan to fund those out of reserves? Or do you plan to fund those out of cash flow? And how do you think that will affect breakeven?

So this is Frank. I'll take the first shot at that. Our capital needs are typically a few hundred thousand dollars a year; that's our normal spend for capital assets. This year I would not expect a substantial deviation from that. What we have done in the past and I would continue to do is do some sort of financing arrangement on relatively large equipment, say we would pay it back over three years or something like that, just to smooth out the spending cycle. And I would envision that again for this year.

Now, at some point in the future, would we talk about potentially larger amounts of capital to support much, much higher business levels? Great. And then at that point we could do either, frankly -- fund it out of current earnings or funded out of a financing vehicle. I am biased in favor of doing something over a period of time to match the benefit and the cost of that capital expense. But it is our intention to be able to do either.

Great answer, Frank. I completely agree.

Then let me ask the $100,000 question. Does that mean we are looking at breakeven EBITDA in the coming year?

I'll take that one, too. We don't --

I figured you would, Frank.

We don't formally give guidance, and you know that.

I know, I know.

But I think it's clear from the remarks, based on our cash flow [in] the year and our sharing of what our plan is for obtaining cash, that I would be lying if I said I didn't plan on being pretty good on cash flow this year because we see the new businesses come up as the year goes on. So I do see our cash flow strengthening. I do see the one quarter of positive cash flow we had last year -- we flirted with it the adjacent quarter. I see is doing better than that this year. So I would be lying if I said that I did not expect our cash flow to improve and you would see positive cash flows from this Company.

Thank you very much, gentlemen. Very, very exciting news.

I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Jankowski for closing remarks.

Does Jim Liberman have another question, as he had mentioned? I think he's probably good. Okay. Well, thank you, Shannon. In terms of the direction of the Company, the quality of our pipeline, and the potential commercial value of our technology, I don't think there has ever been a better time to be a Nanophase investor. I'm glad that all of you are here, and I'm looking forward to achieving and enjoying great returns together. Thanks again for joining us today.

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