Solesence, Inc. Common Stock (SLSN) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Nanophase Third Quarter 2017 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. 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 discussion 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 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. I would now like to introduce your host for today's conference Mr. Jess Jankowski, President and CEO. Sir, you may begin.

Thanks Danielle and good morning to all of you of our current and future listeners out there. Thank you for attending our live call and thanks also to the larger group who prefer to listen online afterwards. Today we will discuss our third quarter and nine months 2017 results along with current business updates. I am Jess Jankowski and I am joined today by our CFO Frank Cesario. It's been a good nine months for our company. Nanophase has posted 9.9 million in revenue and we're on our way to what may well be a record year for total revenue. We're also seeing good customer acceptance for some of our Solésence products including better visibility and commercial launches early in 2018. We continue to refine our business and product development focus to move these products to market as quickly as we can. I will cover more of this after Frank discusses our third quarter results in greater detail. Frank.

Thanks Jeff. Good morning, this is Frank Cesario. Before I begin today's overview of the financial results for the third quarter and first nine months of 2017 please remember that all financial results are stated in approximate terms. Revenue for the third quarter 2017 was 2.8 million versus 2.5 million in 2016. Net loss for the quarter is 0.6 million or $0.02 per share for 2017 versus net loss of 0.4 million or $0.01 per share during 2016. For the nine months ended September 30, 2017 revenue as Jess mentioned was 9.9 million compared to 8.4 million during 2016. The net loss for the first nine months of both periods was 0.6 million or $0.02 per share. Our investments in launching Solésence have been substantial, thus far been funded by the rest of the business. We ended the third quarter 2017 at $1.1 million cash position and $250,000 drawn on our working capital credit line which is repaid on October 3rd. Jess.

Thanks Frank. It's good to see our revenue growth and good to know that our existing base of customers continues to go strong. The demand for most of our products is solid and the market wants what we make. In the Personal Care space the market is demanding more and better solutions incorporating minerals based sunscreens which is good for our ingredients business, our intermediates business, and most importantly our Solésence business. As a reminder Solésence is our wholly owned subsidiary that was created to maximize the value of our patented technology. We believe that we will be able to bring in demand and consumer benefits to market in fully formulated minerals based products. Some of these key benefits our tone correction, environmental protection, and of course full spectrum UV Protection. We have significant externally derived in-vitro and ex-vivo data that support these effects. During 2018 we will be working on in-vivo clinical data to lock in a consumer claims set that will accelerate adoptions by brands. These all add up to help Solésence enable the products, provide evidence of anti-aging benefits which are the biggest driver on the consumer demand side. We often refer to our custom product and white label customers as brands. Brands are the companies that will be marketing these products with their names on them, using their distribution channels enabled by our Solésence technology formulating expertise and regulatory and manufacturing backbone. For those of you who have yet to see it I suggest that you go to our new website solesence.com. There are some very viewer friendly short marketing videos worth watching as well as an abundance of meaningful product information. While we're not selling products to consumers we're helping brands to produce products that capitalize on what the market is demanding. We help them to tell a compelling story about their products enabled by Solésence that will help the brand win in the marketplace. Our goal is to have a few custom or white label products scaling up by the end of this year for launches in 2018. We expect to get some small amounts of revenue relating to this in Q4. We also expect our first Solésence enabled products to hit the market in April 2018. We're continuing to invest in the next wave of growth right now. Also on this call I wanted to give you a quick update on where we currently stand with our polishing business. We announced the new relationship between Nanophase and Eminess Technologies in June of this year. This was done in keeping with our strategy to streamline the business and reduce our sales and technical support load in the policy market allowing us to bring more product and business development resources to bear on fewer, faster growing business areas. I attended Optifab 2017 in New York last week and I'm happy to report that Nanophase and Eminess are working well together and expect a smooth transition in the selling and marketing interface. So far our customer base has been happy with the change with positive feedback coming from everyone that I've spoken to. We believe that this arrangement will ultimately lead to higher customer satisfaction and an expansion of both companies market footprints. Moving on I also want to give all of you an update on our solar control business. Given some changing market and internal customer focus we don't expect any scale ups to begin in 2017 and we're not clear on 2018 yet. We've developed several products that have been well received but we need to continue to iterate in those areas with these and other customers to win here. This would require a significant investment in our product development and business development activities right now. At this point given the steady positive feedback we're getting from our work with the Solésence I've decided to reduce our focus on developing new products in solar control for the near-term. The quantity of iterations that are required in this market coupled with the smaller universal of companies that we can target have led me to believe that we'll get a much better payback from our ongoing Solésence development work in the near-term. We still have an expectation that solar control could be a significant revenue driver for Nanophase in the future but given our existing resource limitations coupled with a consistent positive feedback we keep getting from the anti-aging and beauty science brands, we have prioritized Solésence over solar control for now. Although most of our investors listen to the webcast to review the transcript after the live call I'd like to invite those participating in today's call to ask any questions you may have or to share your comments. Danielle, would you please begin the Q&A session.

[Operator Instructions]. And our first question comes from the line of James Liberman from Wells Fargo. Your line is open.

Thank you, hey there. Thank you and it is a pleasure hearing the progress you're making. I have -- still a bit of uncertainty in understanding the timeline for the Solésence, does it exist right now as a product that you can get or is that something that you said it would be available more like early next year?

It should be available in April, it should be available in April. We will be selling the first wave of our materials we expect in Q4. The brand will be incorporating those materials into their products, staging them, doing their upfront marketing and we expect it will hit the market in April. So at that time we'll be able to certainly share more information but that's when we expect -- that's the first launch we expect next year. There are more in the pipeline but the one that I'm expecting to see solid evidence of in the form of purchase orders and shipments really --

So this is probably obvious to everybody else but so doesn’t step back a little bit so the Solésence then is really a technology and brand that's going to go into other people's products and you're not likely to come out with your own distinct product at this time?

Right, it is an enabling technology. We are marketing it and our goal is to have our technology associated with those brands and to ultimately build enough strength in the marketplace so that the brands are saying hey, we've got Solésence inside where this is coming from.

It is a license to drive several products Jim, that's the whole concept of doing it this way.

You know that makes more sense. I had misunderstood before that you were going to come out with your own product which would compete against and I like this approach much better. One other question, the technology that went into creating the Solésence technology which as I understand it is like clear zinc oxide or titanium oxide but in a solution such that it's so light that you really wouldn't know that you're putting on a sunscreen when you're putting on a moisturizer. Is that the basis for it?

It is that and more and I realize why you would draw that conclusion because generally our entire business on the dispersion side is taking the materials we make and allowing them to be nearly transparent. In the case of Solésence in addition to allowing that we are also -- the technology helps it to be blended into different products staying in discrete form so that it doesn't clump together. But more importantly it prevents all the reactive things that happen in a bottle. So your typical mineral based sunscreens, you put a coating on it and the minute it hits the bottle it starts chewing up the other chemicals and doing other things, some of these are photoactive, some of these are hydroactive, and what our technology does is protects that surface of the particle to allow it to still give you the UVA UVB. Also it reduces the amount of free radicals that get generated. Now free radicals do a lot of things on your skin and your skin generates some of that on its own. But to the extent that you can keep those particles from being reactive, you allow the free radical formation to go down which will cause things like I mean ultimately it will cause sunburn but it also can cause skin cancer and it can cause a lot of other effects that are related to the appearance of aging. So we have a lot tied into the Solésence technology that really brings more to the table than we've seen in the past. And our goal is to move it forward so that we are closer to the end user and we really have a product. So somebody -- when these brands buy the Solésence product they're actually going to have a container with their label on it that they're going to sell through their channels that we created generally. So they're going to give us their label, they tell us what kind of box they want it in, and they're going to get a palette of material that we have a lot of control over which in the end enhances the relationship. And one of the advantages that we have, we've been in this market generally with the Z-Cote HP1 ingredient for almost 20 years, well respected and then bringing Kevin Cureton into the business, he's got a very deep background in exactly what we're doing on the product side and that was one of our original thoughts in having him do that. And things are going well in that regard. I mean everything takes longer than you want and it costs more than you think it should but things are exciting and I think we're going to see a nice change and see some nice products hitting the market in this coming year.

Okay, well that's very helpful. And so and I recognize the need to focus but I am drawn back to the dispersion technology that allowed you to do the Solésence product formulations. So, am I to understand that there are actually a broad array of other potential applications for that same dispersion technology beyond the cosmetics business?

You are, it is as much a surface treatment technology or the dispersion technology. It's not limited to use on particles that we make. It can be used on the industrial side, it can also be used in the personal care side and other materials besides those we manufacture. And I think there are broad uses. My quandary typically is we've got roughly 50 employees, we've got a very large R&D group relative to our size, and they're all highly engaged in servicing these launches and getting it off the ground. So I do think, I mean it's a great question. I think over a period of time you'll see more activity, differing applications coming out. Some will be industrial. That being said the personal care environment, the beauty science environment particularly is so rich for us and very already that at this point my bet is to expand that as much as we can profitably, keep it going, and then what we're generating some cash and we have that a little more freedom of movement start going after some of the other applications that are outside of this space.

Thank you very much, it is quite helpful and I apologize for some of my misunderstanding before, this is great.

You know what Jim, it helps everybody. One of the -- one of my struggles just for everybody out there is that I don't want to repeat myself every quarter on the other hand we get new listeners and new readers of this every single time and that consistent confusion is always going to be there until we get to the point where this is over and over and over again. And we're going to get there.

Thanks again.

Thank Jim.

Thank you again. [Operator Instructions]. This concludes today's Q&A session. I would now like to turn the call back over to Mr. Jess Jankowski for closing remarks.

Thank you, Danielle. Thank you also to all of you who have taken the time to listen in and to support Nanophase and Solésence. We are all focused on new business growth, revenue growth, and cash generation. We are focused this way in order to build our enterprise value in a faster, sustained way from which all of our stakeholders will be able to profit. We're looking forward to our next opportunity to discuss the business with you in a few months. I hope that all of you have a good and productive day.

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