Solesence Inc (SLSN) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nanophase Technologies Corporation year-end 2015 financial conference call. All participants are currently in a listen-only mode. After the speakers' prepared remarks, we will conduct a question-and-answer session.

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 will now turn the conference over to Jess Jankowski, President and CEO.

Thank you, Karen. Good morning, everybody. We're glad you're able to join us to discuss our fourth-quarter 2015 financial results and business updates. Frank Cesario, our CFO, has joined me again today. During this call, we will be talking about some new products, an update on our existing business, our recent financing, and of course, 2015 full-year and fourth-quarter results.

We entered 2015 with the prime goal of growing revenue. In the first half, we took a major hit from our largest customer, and discussed how our other new revenue was filling a good bit of that shortfall as opposed to helping us expand our topline. Going in, I expected 2015 to be a breakout year for Nanophase, with us topping $11 million in revenue and approaching positive adjusted EBITDA for the entire year. In this context, adjusted EBITDA is a near proxy for positive operating cash flow.

Although sales to our largest customer were still down nearly $700,000 for the year, this gap was reduced to the point that other revenue filled the shortfall then exceeded that gap. We also generated cash during two of the four quarters of 2015, demonstrating success from our continued focus on improvement in operating results.

Thanks to strength on both sides in sales and operations, we showed full-year revenue growth, all of which dropped to the bottom-line. These sorts of ups and downs reinforce our need to develop new customers and new products, some in current markets, some in adjacent markets, and some in wholly new markets for Nanophase.

We will address this further after Frank provides a short overview of our financial results. With that, I welcome Frank to begin his discussion. 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 2015, please remember that all financial results are stated in approximate terms. Revenue for the fourth quarter of 2015 was $2.3 million versus $1.8 million for 2014, gross margins of 30% versus 16%, respectively.

The net loss for the quarter was $300,000 or $0.01 per share for 2015 compared to $900,000 or $0.03 per share for 2014. On a full-year basis, revenue was $10.3 million in 2015 versus $9.9 million in 2014, with margins of 30% versus 28%, respectively, and net losses of $1.2 million in 2015 or $0.04 compared to $1.7 million or $0.06 per share in 2014.

As Jess mentioned, our business generated net cash as measured by adjusted EBITDA during the second and third quarters of 2015. We ended 2015 with a $1.3 million cash position and nothing drawn on our working capital credit line. Many of you are aware we have $1 million cash covenant related to our exclusive supply relationship with our largest customer that we disclose in more detail in our SEC filings.

We have used short period vehicles such as this credit line facility on an as-needed basis. Thanks to our improved cash flow results, we did not need to tap the line at the end of 2015. Also, as many of you have seen, we did sell 2.6 million shares at $0.38 per share in unregistered stock sale earlier this month. This is our second equity transaction during the past seven years for $1 million in proceeds this year and $3 million cumulatively during that seven-year period.

Jess?

Thanks, Frank. You may all have questions about our February financing, which, of course, we will be happy to answer during the Q&A session. I wanted to share my perspective on it first, just so that you know where your Company management is coming from.

Your investment and trust are very important to me. I take my responsibilities to you seriously and personally. I never forget that Nanophase has owners that finance us, and that our reason for existing is to ultimately generate a significant ROI. That ROI goal is both to reward our external investors and also to reward our inside equity holders, holders both of open market shares and stock options. We need to all win together.

2016 should be a good year for Nanophase. I expect we will move forward into our market areas and I expect better results than in prior years. In the past, I reviewed all of our major areas in greater detail during this call, but today, we will focus mainly on new revenue traction.

In personal care, which has been composed largely of our active ingredients for inorganic sunscreens, we continue to sell a significant amount of zinc oxide into the marketplace. Late last year, we talked about a new patented coating that we refer to as C3.

We believe C3 will both enhance the aesthetics of a sunscreen, from skin feel to reducing that small amount of whitening, while also addressing a hot-button topic in the industry, by aging -- by aiding in -- well, anti-aging is part of it -- and by aiding in photo stability and in free radical quenching.

In addition to adding to a formulation that is full-spectrum UV protection, our C3 coated materials bring the added benefits of allowing other ingredients to perform better by remaining stable and reducing free radical formation. We have demonstrated value from C3 in our first titanium dioxide dispersion sunscreen product, which we understand has been sampled to a large number of potential customers nationally and internationally, and for which we recently received our first commercial purchase order. We have also successfully applied C3 to zinc oxide, and plan to develop additional products that we believe will provide a competitive advantage.

We added a full-time formulator to our team last fall in order to further this product development, and act with a speed and depth in this market that we haven't had in the past. And we are continuing to build our personal care product development capabilities to allow us to capitalize on our new technology.

I believe C3 is the single most exciting thing that Nanophase has developed during the past several years. We understand this market better than any other, having sold into it for the better portion of two decades. And we see a competitive advantage that we believe can generate real value to all parties.

That said, C3 isn't solely for personal care. We view it as a coating platform that should be applicable across many product areas. Although personal care will be our initial focus, we look forward to continuing to exploit this competitive advantage in the broader marketplace.

On the energy front, we have developed and sold solutions specifically in the solar control area. This refers to several applications involved with improving energy conservation. Think of the window films used on vehicles and buildings. We also developed an additive for batteries that is designed to replace high-cost material at a lower cost, and potentially a higher level of performance.

The decrease in commodity prices during 2015 has reduced the incentive to drive near-term action on the part of our target customer base in the batteries market, but our technology remains viable. And we expect commodity prices to continue to fluctuate over time, potentially in a way that will stimulate this market.

We have also seen an increase in our coatings business between 2014 and 2015, which can be attributed to some new product sales coming online after extended downstream product development cycles. Although I don't view this area as a major growth driver for Nanophase over the next few years, coatings generate significant sales at good margins and we continue to support these customers.

Overall, our plan is to grow revenue during 2016. We believe that we will be successful in doing that, and look to expand upon the progress that we reported here today. Although most of our investors either listen to the webcast or review 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.

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

(Operator Instructions). James Liberman, Wells Fargo Advisors.

It's nice to see the progress you are making. And did I catch that right -- is it called C3, the C3 --

Yes.

-- platform?

That's the technical name for it. And we refer to it as the C3 coating and the C3 patent. We will probably do some branding work down the line as it gets out into the market further.

Can you give some rough ideas beyond personal care? Or is that pretty confidential how you want to look at that, the types of ways in which this new technology might be seen by a layperson?

It is not necessarily confidential. We haven't explored it with a ton of depth. Essentially what the coating does -- so we are taking very active materials, zinc oxide, CIO2, and it would apply to almost our entire product suite. Materials that are photoactive, frequently they can cause oxidation and other things.

We're putting a coating on them, which allows them to retain their inherent positive properties while not oxidizing or releasing ions, which means basically if you were to put this in a plastic or a film, or even in a standard coating, you would have the benefits of the particles, say, UV protection, without the detriments of the particle as it is being hit with the UV, partially contributing to the destruction of the coating.

And that has been an issue for a long time in the marketplace with some of the nanomaterials and larger materials. But that's -- we're focused initially on personal care, because we are closest to it. We have a partner outside of our largest customer who is out selling our first product, and we think we're going to be able to develop more.

Yes, just as a bit of color, Jim, it was explained to me this way. And as the finance guy, they always try to make it simple and colorful. Think of an M&M. This is like the shell. So, it keeps what's inside protected from what's outside, and lets it work very nicely in formulation, as opposed to other surface chemistries that tend not to hold quite so firm.

So, it gives us a nice advantage in formulating, as Jess said, a diverse number of final products across the suite of what we do. And, frankly, this was the obvious first place to use it.

Almost universally, the C3 coating allows us to make very high percent of solids dispersions. So, that's a little bit inside baseball. But essentially in the market, there are a lot of people that are selling dispersions, both in personal care and in industrial uses, that might be at 25%, 35% by weight that look like a putty or a paste. And with the C3 technology, we have some dispersions that are in the 70%-plus by weight range, meaning that the carrier that it's in does not have to be a major part of the formulation it is going into.

So, if you were to go look at a physical sunscreen, something like Oil of Olay Complete, where it says it's got X%, 5% zinc oxide in it, if you put a dispersion in there, and you are only allowed -- and you can only give them a 20% dispersion, then the other 80% of whatever it is has to go in there at a fairly high concentration. And that's not a positive in almost any market we serve.

So, there are a series of things. And then -- not the least of which relative to personal care, is aesthetics and tactile -- it feels better. It doesn't clump together. It stays dispersed nicely. It stays in its primary -- roughly, its primary size. So, you would get around some of the issues that we've had over the years -- not just us, we, but the markets in general have had with small particles like these.

That's very helpful. So, I can understand how this technology could be accepted more readily into the personal care area where you have had a lot of experience already. But in other areas, do you expect like another -- like these lead three to five to seven-year time-frames? Or do you think this product is so differentiated that it won't require that long a lead-time?

I think it really depends on the specific area. If we -- I mean, one of the areas that we used to have a fair amount of development work in were for UV-resistant coatings for outdoor surfaces.

Yes.

And essentially, to do those tests, they still have to go through a couple of freeze/thaw cycles. So, you are automatically in a longer-term cycle. So, I think -- I look at it and think, if we get it going in areas that are more like film coatings and interior coatings that are potentially incorporated into a plastic, that takes a lot less testing than architectural coatings for outdoors, just because the lifecycle has to be longer.

Now that being said, there still are film applications like sandwiched in architectural glass, say, that have to last a long time as well, relative to functionality. So, it's a matter of us -- it's a matter of a couple of things, Jim.

We are trying to focus the resources we have on a few narrow areas initially to build market knowledge, depth and get some momentum. And that will be a matter of -- is it something that Nanophase directly will try to develop into the market? Or do we have a partner of sorts that will go out and do a lot of development work and move it forward more quickly?

And I think that's -- that has been the challenge all along. And that is our -- it is always the math that you do between getting the most possible return per kilogram of material versus selling the most possible kilograms of material in the marketplace.

So, we are -- I think that's a spectrum that you're looking at. I think there are things that could be assured as a year or two, and I think there are things that could be in that typical five-plus-year range. And we -- of course, if we were going to own the development and the push, it is going to have to be in a shorter time-frame just because of who we are and where we are at.

Right, thank you. And one other question if I may. Regarding the energy conservation category, and did I hear you say think of window coatings?

Films and -- films that would go on a window. We have a couple of customers that are buying materials that are used to conserve energy by keeping -- by absorbing infrared or other areas of the spectra and keeping it on the outside of whatever that glass is, whether that would be a windshield or an architectural window. We have some small inroads in that area.

And are you saying that this area is actually making some substantial progress toward the market?

Substantial is a big word. (laughter) You know, having -- I mean, we expect to have six-figure revenue in the area. To me, at this stage, seven-figure becomes substantial, and I don't know that we will do that this year. It really depends on market acceptance and also who -- us being with the right folks to do that.

We have, as you know, Jim, being involved for quite some time, you've got to kiss a lot of frogs to get somebody to really take off with it. Because ultimately, we are putting a material into a dispersion and selling it to somebody who is putting it into a film, and then selling that downstream. So you've got several hands touching it.

I expect to see further progress on it this year. I think we have got a material that -- it's not necessarily a game-changer; it's certainly an enabler. And it functions as well or better than materials that we are competing with.

So, I think it could be a good thing. And I think, through the year, we should be seeing more progress. And potentially -- you know, we're working on -- because it is in the sweet spot of what we do, in terms of really understanding particle chemistry, surface chemistry of the particle, it is an area that we are applying some more resources to, because we think we can tease out some more value there.

And just as a reference and to tie up your earlier comment, Jim, our first revenue in this area was the second quarter of 2015. And that revenue increased to a six-figure order. It is now increasing again. So, we're certainly -- we are happy with that. It's just -- it is a very large market and we're trying to navigate where we should be.

Thank you very much. It really sounds like you have got the focus now. I think you have finally got the economic resources as well with your recent financing. I think that was a great move. And I look forward to seeing how the year plays out. Thank you so much.

Thanks, Jim.

Rand Kay, RKA.

Listen, I kind of have a series of questions, so help me navigate this a little bit. We historically talked a lot about the solar control and the energy storage business. And some time ago, you guys also talked about looking at markets that were not -- that were potentially markets that could be $10 million as opposed to $1 million or six-digit markets.

I am wondering -- I'm hearing a bit of emphasis change in your mindset, and I am wondering how your philosophy is now changing from a standpoint of going after the blockbuster versus going after singles and doubles in a market you seem to already have a lot of expertise in? And I presume we would associate those potential multimillion-dollar projects with markets that are new to you.

So, I'm just wondering about if you could just provide a little color or clarity around what markets you are now more focused on from a standpoint of generating revenue quarter-after-quarter-after-quarter, and thinking about bottom-line profitability as opposed to, are we still shooting for the $10 million home run?

Sure.

Was that clear as mud?

(laughter) No, that was clear. I feel your confusion and I understand where that could come from. We have got two -- we have got more than two things going on. We have got two major focus areas now and it's personal care and the solar control. In addition, there are some other things that go on. Just part of that is driven by our customers and we are not as involved in the development.

The solar control market is faster to market actually than personal care, because of the nature of it. Personal care is regulated as an over-the-counter drug, so you have got growth, but it's not rapid growth initially. When it ramps, it ramps well. If I started a personal care product project today, I would be fortunate to see significant revenue next year. It would be more like 2018.

That being said, at the Company stage, picking up $0.5 million worth of personal care revenue for next year or late this year is quite possible. It is getting into the bigger numbers.

Now I think, ultimately, our personal care business can more than double, but it won't be with another large $7 million customer. It is more likely it will be with a series of products that are relatively similar from a scientific perspective, different from a consumer claims perspective, that we go out and either we sell or we have somebody sell for us.

And that is -- those will be singles and doubles in your parlance, getting that out relative to -- on a year-by-year basis. I think on a longer-term basis, that could be a significant chunk of business, and that could be our $10 million additional opportunity.

The solar control business is different in the sense that that market is much more -- it is a much quicker adopter. It is more technically-driven, and there are smaller players in it that, while small relative to the giants in the industry, by significant quantities of material. So, it's possible there that we pick up additional revenue this year. I am not anticipating seven-figure revenue this year.

I do think that market can be somewhere in the low to mid seven-figure range for us in the near-term as in five years. Beyond that it is hard to know yet. What you did hit on the head, Rand, is that we're in a situation where we absolutely have to get to the point where the Company is self-sustaining. We just recently raised some money. It was an excellent deal for our shareholders relative to what's available in the market.

However, we exist to get an ROI. To get that ROI, we have to first stop the cash flow going the wrong way. And some of that is. We hit a couple-million-dollars worth of singles and doubles, we get to a platform that is a lot more stable. And I am more focused on that today that I am on just hitting the big ones. And part of that is just it is so difficult to determine where that is.

I mean, I alluded to I think there is still business for us in the battery business, I just -- commodity pricing has moved so much that it made it less attractive to the battery companies. And so we pulled our horns in. With viable technology that is sitting on the shelf and we're still -- we've still got some projects going, I am just not banking on it.

Lastly, I think what we didn't talk about at all today is polishing. And there is business there to be had at nice margins. It just -- I don't picture that business being a [$2 million to $5 million] business over the next several years. I think it may grow incrementally. There is pieces we can't control.

And we have developed a series of products that are fully developed, and we are putting our development efforts into newer areas, particularly with -- I mean, the personal care essentially, we have been selling products into that market for a while. We have got a good reputation in the market. It requires a ton of infrastructure to be able to supply an over-the-counter drug in the United States.

And, so, essentially, we looked at it and said, I have assets here that are in place. I have expertise that I know -- and we get audited by world-class Fortune 10 companies on a regular basis, consumer companies that are coming in here and admiring what we are capable of doing.

We also know that a lot of customers downstream to us don't have those capabilities. And it is one of the things where the barrier to entry is pretty high. And looking at that and trying to leverage that is a high priority of mine basically, because long-term, this Company is going to be in that business for a while.

I mean, we may hit the home run in three years and discover something, and realize it's widespread again, but I think we will be in the personal care business for a long time. We have got this critical mass of assets here.

It is known to us, and I think the C3 puts it at a point where we think some of the limitations on minerals in this market, Ti02 and zinc oxide specifically, have been their lack of workability into solutions. It is too whitening; it is gritty; it is whatever.

We have been working on that. Ours are better than what is out there already, but we have been working on that to the point where we want to make there to be an almost even exchange, because the market as a whole would prefer minerals as UVA and B blockers than they would organic chemicals.

So, that's kind of a long answer. It may have been a muddy question; I probably gave you a muddier answer. But there are a lot of moving parts to it.

Well, I have to say this is the most positive news that I have heard in a long time. Because to be frank with you, I have been concerned about going into emerging or disruptive markets where the worst part of the entry into the market is not knowing what we don't know.

And I think the strategy that you guys are now utilizing of, this is where your expertise is. building singles and doubles, showing the market, okay -- and when I say the market, I mean The Street -- that you guys can generate consecutive revenue and build on that, and fund future development for that potential home run product out of revenues from existing markets generated by singles and doubles, is going to create a host of confidence in the marketplace and really, really help the stock.

And to be honest with you, five years of sub-$1 stock, I appreciate the change. So, I am very heartened by what I hear.

What you are kind of saying too is that, thank you; we need this. To get on the radar, the stock has to move. The stock is not going to move without results. I understand that. Sometimes I dread these calls, because I feel like I'm saying the same things. Partly that is because we're in long lead-time markets. I mean, all of them take a while. And when you make a mess, as you suggested by having less deep market knowledge, going after a new market, it is tough.

Because we are out buying expertise on a consultative basis for some of these markets; whereas in personal care, this Company has a lot of history, I have a lot of history, Kevin has a lot of history, and we have been -- I think because of the way we came up in it, we were actually adding our expertise to outside companies, talking to them about it and opening their eyes to things that we can accomplish for them that they can't do on their own.

We are not doing that for a battery company, say; we are showing them a great material that we invented or we perfected in an application that technically makes a ton of sense. But we don't have an organization that has been geared around that market for a long time, which is why, last year sometime, we talked about that being a disappointment to me and missing it a little bit.

It is almost a function of who this company is. You know, you've got 45 employees, we have got $10 million in revenue. We run it lean. We have got a really flat organization. And that almost speaks to go deeper in what you know better, but don't give up on some of the fundamental research. Because our team here is really exceptional.

I mean, the work that we've done -- I mean, it is frustrating sometimes when you realize that a lot of this is -- you've got to get that first bite at the apple and really start to grow. And I think it will be -- they will start to fall a lot quicker than they have been.

Well, as I mentioned that is the most positive news, because the thing that is most disheartening to an investor and The Street are the words -- we had not anticipated. And the fact that you guys are changing the focus and circling the wagons around core competency, and making an open commitment to drive bottom-line and profitability, and fund potential growth opportunities as expertise develops, is very, very, very heartening to me. Very heartening.

So, I appreciate that, guys.

Thank you. Thank you.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Nanophase for any additional comments.

Thank you, Karen. In terms of the direction of the Company, the quality of our pipeline and the potential commercial value of our technology, I am a strong believer in what we can achieve at Nanophase. We are positioned well going into 2016, and I'm expecting a good year. Thanks again for joining us today, everybody.

Thank you. And ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now log off and disconnect. Everyone have a good day.